Monday, May 04, 2020

Argentina's grim record of economic failures and debt defaults

In February 2020, Pope Francis, a native of Argentina, gave strong support to debt renegotiation at a Vatican seminar on debt owed by poor countries. Pope Francis greets Kristalina Georgieva, IMF managing director, as Martín Guzmán, the Argentinian economy minister, looks on. Ms Georgieva will likely be more forgiving by extending the payment time periods on IMF debt, than the Gnomes of Zürich and elsewhere!

"Argentina has suffered a long history of booms, busts and failed economic reform. The nation has defaulted on its debt eight times, suffered hyperinflation twice, and gone through multiple balance of payments crises as well as 20 IMF-supported economic programmes in 60 years."

This grim economic summary comes this week from Martín Guzmán, the current Argentinian economy minister, in an opinion piece in the Financial Times.

Three weeks after the minister's comments on May 22, 2020, the republic missed a deadline to pay $503m in interest on dollar bonds issued under New York law. It marked Argentina’s ninth default since independence in 1816.

Guzmán is the 26th economy minister since democracy was restored in 1983.

He is seeking a deal with international creditors on $65bn of external public debt and in mid-April the government missed $500m in scheduled payments on 3 foreign bonds, starting a 30-day countdown to a formal default.

Argentina has proposed a 62% “haircut” on interest payments, a drop worth almost $38bn, as well as a 5.4% cut to the face value of the debt, which is equivalent to about $3.6bn.

Guzmán said, "It leaves creditors with an average bond coupon of 2.3%, versus their current 7% average."

In a population of 45m more than 35% of the population and 52% of children are already in poverty according to the minister.

Separately, the former right of centre president (2015-2019) Mauricio Macri had won a $56bn deal with the IMF, which was the largest loan in the fund's history. About $44bn has been delivered so far. The terms of the original deal stated it had to be paid back by 2023.

In 2019 annual inflation in Argentina was at 54% which illustrates that when central bank money printing becomes an addiction, the road to ruin beckons.

In the past decade, Argentina had some good years but the economy is over-reliant on volatile commodities.

First modern globalisation and collapse

According to the Economist, from 1870 to 1914, the first great modern era of globalisation saw rapid economic growth, trade that grew faster than GDP, mass migration from Europe to the New World and convergence of real wages between the old and new worlds. In Europe, GDP per capita grew more than 70%; in the new world, (Argentina, Australia, Brazil, Canada and the United States) it doubled.

"Migration rates were remarkable. In the decade 1901-10, 5% of those from Austria-Hungary left the country, more than 6% of Britons, 7% of the Irish, 8% of Norwegians, and nearly 11% of Italians. Argentina added another 30% to its population, in immigrants alone, in that decade. Europe had lots of workers; the new world not so many. So as the workers moved, real wages nearly doubled in Europe during the period compared with a 50% rise in America."

In 1914 half of Buenos Aires’s population was foreign-born and Argentina ranked among the 10 richest in the world, after the likes of Australia, Britain and the United States, but ahead of France, Germany and Italy. Its income per head was 92% of the average of 16 rich economies.

Argentina became rich by taking advantage of shipping refrigeration for meat in particular, and grain for big markets such as the British Empire, which became its biggest trading partner.

Half of Argentina's capital stock was owned by foreigners in 1913 and the wealthy landowners were not concerned with developing a manufacturing base.

The Great Depression hit Argentina hard as demand in Europe and the United States for its farm exports collapsed as tariff barriers were raised.

In 1930 the generals staged a coup against the democratically elected President Hipolito Yrigoyen. In the remaining 70 years of the 20th century, more generals (14) than civilians (11) became president.

According to Reuters between 1930 and 1983, presidents averaged only two years in office, while the economy minister was replaced at a rate of once a year.

Raul Alfonsin was elected president in 1983 and the number of public employees jumped while government revenues remained flat.

In 1989, only 30,000 out of 30m Argentines paid any income taxes and inflation hit an unprecedented 5,000%.

In 2001 Argentina defaulted on its debt and in one two-week period amidst the chaos, there were 5 presidents.

In the period 2007-2015 when Cristina Fernández de Kirchner was president, her governments produced fake inflation statistics.

She is now vice president of Argentina.

Postscript Sept 1, 2020: Martin Guzmán, Argentina’s economy minister, announced on Monday, Aug 31, 2020, that 99% of private creditors holding $65bn of debt had accepted the Argentinian government’s proposal to extend debt maturities coupled with a fall in interest rate payments from an average of 7% to about 3%.

The Argentine government has turned its attention to restructuring its $70bn debt with multilateral institutions. In late August it formally requested to begin negotiations with the IMF, which has lent the country $44bn as part of a record $57bn bailout programme dating from a currency crisis in 2018.

“May we never again enter this labyrinth [of indebtedness], please,” President Alberto Fernández said.

“Know that in 10 years’ time, in 2030, Argentina will owe $38bn less than what we owed last year. None of this was easy, but if there’s something Argentines know how to do, it is to pick ourselves up when we fall.

Today we are standing, and on the move,” he added, thanking Pope Francis, an Argentine, and the leaders of Mexico, Germany, France, Spain and Italy for their support during the negotiations.

The 2019 GDP of Argentina was valued at US$450bn. GDP per capita was at $10,000 and the public debt ratio was 89%.