Debt Restructuring: It’s Good News; But was it also a success?

Foto Aldo Abram
Aldo Abram

DATA CLAVE – There is no doubt that the debt restructuring agreement is good news for Argentines; because it takes off the horizon the possibility of a default that would have deepened the crisis. However, avoiding the worst does not always mean that it is the best possible outcome.

There is a big difference. In principle, we can leave without consideration the time it took us to reach the agreement, which implied high uncertainty and led to greater capital flight, underfunding the economy, encouraging less consumption and investment, and consequently reducing domestic demand. Above, it is not possible to say that the “patience” of the government was compensated by the acceptance of the creditors of a strong write-off.

On the contrary, it was the National Government that was forced to travel the greatest distance to reach an agreement. Nor can it be celebrated that the future amount of payments has been lowered; since there will be no “savings” to spend. We never generate an excess of income over expenses that would allow us to pay off debt in net terms. In fact, the usual thing was that the State accumulated more liabilities.

However, it is logical that this was the result. You can imagine a businessman who asks his creditors, for the ninth time, to refinance his debt. It will be obvious to them that you are not managing your business well and they will ask you “what do you plan to do to change that mismanagement?” This is the case of Argentina and the government’s response was that this “was not a matter for the creditors” and that their only concern should be to accept the proposed restructuring.

Of course, what will be clear to creditors is that there will be no course changes and that the prospects for future collection will be highly doubtful. Why are they going to grant a large reduction if they will discount that there will be another future renegotiation in which they will again have a new cut in their debts? Why will they accept debt restructuring conditions that restrict their ability to pressure them to demand payment in the future, if we defaulted on their payment again? It would be suicide.

Fortunately, there was a predisposition to reach an agreement. That of those who negotiated for the Government was demonstrated throughout the journey made between the original proposal to approach the creditors. Which is logical given the high economic cost that a default would have had.

On the side of investors who have Argentine bonds, it must be taken into account that they manage huge third-party savings portfolios that are placed in financial assets in a world with high uncertainty due to the pandemic. Only a small portion of it is in Argentine papers, causing them a huge headache, at a bad time. It takes two to dance a tango, and luckily they were there; even though the music the local negotiators chose was bad.

It is obvious that, if at the beginning of the negotiation the government had announced that it would solve the underlying problems that the country has, advancing in the pending structural reforms, the expectations that Argentina could grow steadily would be much higher. And, consequently, so would the chances of creditors to collect the securities that will be delivered in exchange for the restructured debt. In this way, the generosity of the creditors and their eagerness to reach an agreement would have increased, allowing them to accept a larger reduction and shortening the negotiation time.

However, there was no announcement of a structural reform program and, unfortunately, it is clear that this is because there will not be. The proof of what I am indicating is the fact that it has not been arranged with the IMF before the bondholders. If there had been a will to resolve the country’s underlying problems, it would have been better to address the reforms within the framework of an audit by this international organization. In this way, the credibility that we would fulfill this commitment, which we have already broken on other occasions, would have been maximized.

Furthermore, under the condition of making these reforms, the government would have received more funds, which are highly necessary for the recovery of the level of activity. Gambling everything to increase confidence would have made it easier to achieve a better deal with creditors and achieve a greater recovery of the economy.

In any case, having restructured the debt with the private parties, refinancing the terms of the one corresponding to the Fund will not be a big problem. Relevant conditions will not be accepted; deadlines will be stretched; although without contributions of resources, beyond those that will be granted to all the countries hit by the pandemic. This topic should not be a great generator of uncertainty going forward.

The greatest risk for the future is that the government thinks that Argentina’s main stumbling block was debt restructuring, when it is only the consequence of the real problems. For example, that officials who access the State insist on spending much more than what we Argentines can pay, despite a tremendous tax pressure.

It should be remembered that this week is when most of us Argentines will have stopped working for the State and we will begin to do so for ourselves and our families. Furthermore, according to a World Bank report, if all SMEs complied with their taxes, the vast majority would go bankrupt. In that same report, we are ranked 21st out of 190 countries, among those that most squeeze their companies with taxes.

However, this is not enough for them and therefore they go into debt. If we continue on this course, it is only a matter of waiting for a volume of debt to accumulate that we Argentines will not be able to pay and we are facing a tenth debt restructuring.

The agreement with the creditors will bring less uncertainty; some increase in domestic demand and therefore in the level of activity; less drop in demand for pesos, which will decrease its depreciation, moderating exchange and inflationary pressures and finally a little more financing for the public and private sectors.

However, if the underlying problems are not resolved, all these improvements will be temporary, that is, they will last more or less depending on the case, leading to a new crisis. The Cambiemos government demonstrated that no improvement in the economy can be sustainable without rapid progress on pending structural reforms.