The effects of a DEFAULT on the ARGENTINE ECONOMY


The renegotiation of external debt with private creditors does not look easy and a default could have consequences for the Argentine economy.

Argentina has a tough ahead debt renegotiation with private creditors, amid a local drop in consumption and a complex global context due to the expansion of the coronavirus pandemic. Due to this recessive situation, no one rules out that the country can once again face a default in the payment of external debt.

In this regard, the question asked by many focuses on what would be the effects of a default on the Argentine economy, which already has serious growth problems and numerous variables in red.

According to some market calculations, Argentina has a total gross debt of almost US $ 312 billion with private organizations and other creditors, which is equivalent to 92% of the Gross Domestic Product (GDP).

Of that amount, the country owes around US $ 44,000 million to International Monetary Fund (IMF), although from the Government it is considered that with this organism there will be no inconvenience of stretching this payment for a few more years.

Also, the debt in public titles in the medium and long term, it amounts to some US $ 194 billion, of which 80% is in foreign currency. The big problem that worries the market is the concentration of maturities in the short term, because during this year the country will have to pay capital commitments of $ 48,968 million and other $ 14,838 million for interest. .

The main problem to be able renegotiate the debt and not fall into default it would be with the private holders of these securities, who would have serious doubts that Argentina can meet the payment of these papers, in a domestic environment where there are no signs of growth that is seriously aggravated by the international context, specifically due to the expansion of the coronavirus .

Even the president of the Central Bank (BCRA), Miguel Ángel Pesce, indicated days ago in an interview that the default“of sovereign debt is a possibility, to clarify later that he hopes that this “does not happen”.

“The point is that with default in the bond market under foreign law and all financing doors closed, the default at bills and bonds issued in dollars in the domestic market it is also sung. They are US $ 8.2 billion and US $ 9.2 billion that expire under domestic law in 2020. Argentina will only be left with financing in pesos in the domestic market, “summarizes a report by the Economy & Regions.

The Minister of Economy must overcome the default of the debt and an impact on activity

Effects of default on the economy

Now, with serious probabilities that the Government will not be able to pay the debt, the question to be resolved is what would be the effects of a default on the Argentine economy.

In that sense, iProfessional consulted Natalia Motyl, economist of the Freedom and Progress Foundation, who stated: “If we go into default, the crisis of confidence that our country is suffering “.

In his opinion, this would occur at this time because both investors like families “are postponing their economic decisions due to the high level of uncertainty that our country has “.

A problem of trust which is the result, first, of “having taken policies during the last 20 years against the market and in favor of political interests, and, later, for not having a future economic plan”, Motyl summarizes.

Argentina is handling a degree of uncertainty such that “a default would worsen the situation since it would be a public declaration that we are a country that is not capable of fulfilling the commitments it assumed,” the economist said.

And he completes his idea: “Unfortunately, Argentina has a history of not complying with its obligations. That puts a lot of pressure on future debt negotiations. Therefore, it requires a more urgent shock policy that solves the problem of background since gradualist policies do nothing but slow down the impact. “

A report from XP Investments says that if the offer to creditors implies a 40% discount in the Net Present Value (VPN) of the offer, then investors would agree to redeem.

On the other hand, if the Government wants to play more aggressively and present a proposal that contains a pruning of 60% (as the market now estimates), there will be a strong short circuit.

“If Argentina becomes greedy for the argument of generating an ephemeral reduction in the level of debt over GDP, then investors will fight, and quite possibly they will do so very hard,” said Alberto Bernal, the XP strategist.

Specialists predict strong consequences if Argentina goes into default

More effects on the economy of a default

Another consequence of entering into a default is not being able to access the capital markets.

“We are already quite restricted in this sense since the stocks do not allow capital to easily leave, but neither do they allow it to enter. This is a barrier that prevents economic recovery, since in order to grow, Argentina needs, mainly, capital that does not it has and should attract them from the rest of the world, “says Motyl.

Therefore, by not being able to access the capital market, Argentina “will have to or rise more taxes, further destroying the country’s productive structure or issuing money that nobody wants, which will end up accelerating the inflation

Likewise, capital flight, a natural reaction to fleeing from an extremely vulnerable financial system, is estimated to will cause setbacks on the exchange market and the Bookings. “Shooting the informal exchange rate, to keep the stocks, and the central bank selling reserves in an attempt to contain the official dollar “, completes Motyl.

In summary, experts estimate that all this situation will end in more inflation, flight from deposits, fall in reserves, among other negative aspects for the Argentine economy.

“Definitely, the worst case scenario and the one the government should avoid is a default “, Motyl concludes.

The political cost is also very great, so the governance “would be at risk”. So from the City it is recommended that all the chips should be put now to achieve a successful renegotiation, and for that it is argued that it is necessary to reveal the economic plan and carry out a series of reforms structural, to return our country to the path of economic growth.

“In this context, in which the demand for money is already falling and the dollar is already rising, and therefore inflation sooner rather than later will increase again, there will be more money supply that will produce an additional and greater fall in the demand for money,” delimits the report of Economy & Regions.

And he adds that the exchange imbalance will increase, because the dollar MEP, the dollar counted with liquidation (CCL) and the Dolar blue.

The exchange gap will jump and the current pseudo transitional stabilization will end. The interest rate, which is now artificially lowered, will have to jump again; otherwise, the rise of the dollar will have no ceiling. It is easy to see. The official exchange policy must change, “completes Economy & Regions.

To add that this excess demand in the foreign exchange market will translate into “excess supply in the capital market, in the money market and also in goods and services and in the labor market. ”

In conclusion, E&R economists argue that these oversupply, in each of the aforementioned markets, “will mean increased capital cost (interest rate), plus inflation, higher recession, minor (more) job (unemployment) and lower purchasing power of wages; respectively”.

And they warn that we are in the “best part of the year”, so it is interpreted that “this is the best that Guzmán’s economic plan could give. Then there will come a second stage of the year that is worse, much more difficult.”

In this regard, they argue that, probably, “The economic plan will be further radicalized with respect to the present.” With this they mean that there will be “more intervention and more controls”.

Likewise, from Economy & Regions they affirm that the macroeconomic variables at the end of 2020 will be worse than at the end of 2019.

On Wall Street they have their perspectives on the impact of the default in Argentina

On Wall Street they have their perspectives on the impact of default on the Argentine economy

Impact on the economy, according to Wall Street

The view that there is on the country from the outside is also important. For the investment bank XP Investments from Wall street, there will be seven specific effects on the Argentine economy if a default is decreed:

1- A “hard” default; that is, a massive default on the bonds to be restructured.

two- Greater contraction in demand for money, because investors will no longer want pesos and they will demand safer assets.

3- A much longer and deeper recession than what is currently experienced.

4- Levels of poverty much higher due to the deterioration of the economic-financial situation.

5- Increased rate of inflation product of the economic disaster.

6- A further widening of the exchange “gap” in Argentina.

7- Further downgrade in Argentina’s debt rating to the status of “irrelevant” country within the community of investors, something that would affect YPF’s ability to find financing to develop the potential of Vaca Muerta.-

“We still think that Alberto Fernández wants to be remembered as an effective president, not one who sank Argentina even furthers. Again, the pragmatic path here is to quickly complete the debt restructuring process; the ideological path implies much longer trading time horizons, much lower growth rates and much higher difficulties for society, “detailed from XP Investments.

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