Argentine debt crisis resolved?

Ever since Argentina defaulted in 2001, it has been in fiscal trouble. Up until 2016, populist governments actually refused to pay back any foreign loans. In late 2015 however, Mauricio Macri became the new president of Argentina, and went on a course to repair Argentina’s credit rating and fiscal troubles. The country settled its’ debt with international bond holders, agreeing to pay back a certain percentage of the par value. However, lately a surge in US treasury yields has caused the Argentine peso to depreciate greatly against the dollar. Since most of Argentina’s foreign debt is issued in US dollars, this caused significant problems in paying back their debt.

The IMF steps in

In order to tackle the debt problem, Argentina has been in talks with the IMF. Argentina will receive a $50bn rescue package from the IMF, in exchange for halting government currency intervention and giving the Argentine central bank full autonomy. The deficit is also to be ended. The terms could be difficult for Argentina to meet, as the president has to tread carefully, balancing out austerity and fiscal responsibility while at the same time keeping populist forces in check. Nationalist governments had ruled Argentina since 2001, and defaulting on debt has basically been their policy. Fiscal conservatism may not be appreciated by the electorate, but is necessary to meet IMF demands. It will therefore be interesting to see what will happen in the coming years, as Argentina is supposed to close its’ budget deficit by 2020.

Voters will probably appreciate the government tackling the 28% inflation that is currently destabilizing the Argentine economy. Interest rates are currently as high as 40%, in order to tackle inflation. This is something that urgently needs fixing.

China

The IMF is not the only party approached by Argentina though. The country is in talks with China for a support package as well. In 2015, the Argentine central bank and the People’s Bank of China agreed on a currency swap agreement. Mr Peña, the Argentine cabinet chief, hopes to build on this agreement to enlarge the swap. This move could cause Argentina to drift towards China as opposed to the United States, although thus far political implications are not quite serious yet.

Impact on the economy

The fact that the Argentine central bank currently maintains interest rates of 40%, is quite harmful to small businesses. Long-term, this rate is just unsustainable as it really prohibits borrowing. Especially the real estate sector is hit hard, according to Mr Groisman, an executive VP at Grupo Presidente, a real estate developer. The interest rates are to stay for the moment though, spelling trouble for the Argentine economy. Long-term projects are put on hold because borrowing is simply too unattractive, and some industries such as textile even run mostly at a loss.

In previous years, the government had been pumping money into the economy to keep it afloat. The IMF lifeline might help sustain the economy for a bit longer, but it is unclear how long this situation is going to last. Therefore, it might be interesting for you as an investor to look into either Argentine bonds, credit default swaps or currency futures. These instruments will allow you to gain exposure to Argentina. Just be careful which direction your exposure is going, as it is rather unclear what is going to happen exactly.

Written by Xander Gelink