Panic and the Peso: Argentina’s Debt and Currency Woes

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Last Friday, Argentina missed the final deadline for a $500 million of interest payments on its sovereign debt. In response to this, the central bank have put forward a bond restructuring offer to allow short term debt relief which will set Argentina on the path for sustainable future growth. The offer, including lower interest rates and a hiatus on principal and coupon payments, marks a convergence between what creditors want and what the Argentinian government is offering. While negotiations are set to continue, fears of another sovereign default still loom large.

Argentina’s debt struggles can be traced back to the economic crisis of 2001/2, when fiscal stimulus to help prop the economy resulted in extensive government borrowing. This left Argentina susceptible to a number of exogeneous shocks, namely the appreciation of the US dollar, for which the Peso was pegged. The series of events that followed, namely steep interest rate rises, widening credit spreads and frozen bank deposits, resulted in Argentina defaulting on its $93 billion of sovereign debt.

Fast forward to today, Argentina was badly placed for the arrival of COVID-19. After suffering recessionary conditions of high unemployment and low economic growth, coupled with a staggering inflation rate of 53.55% second in South America only to Venezuela, the short to medium term outlook looks bleak. According to the IMF (International Monetary Fund), Argentina’s real GDP growth rate is set to be -5.72% for 2020, with the unemployment rate set to rise to over 10%.

Argentina, along with other emerging economies, has suffered a fall in real GDP growth

The difficult economic conditions in Argentina, most notably the inflation rate, has triggered a downward spiral. Rising inflation has led to a fall in the value of the Peso, making it almost impossible to facilitate overseas debt and forcing extensive money printing to fund current fiscal programs. With a last recorded national interest rate of 38%, lowering rates to save on future debt payments may cost the economy dearly regarding future prices.

The effect of the pandemic on Argentina’s credit situation is currently hanging in the balance. So far, mounting fears of sovereign default earlier in the month have been counteracted by the Government’s forward-thinking plan and optimism for a new deal, helping bond prices to recover. But this could soon dissipate if creditors reject any new proposals, with some forecasts predicting bond yields to rise above 90% by the end of 2020. Argentina’s 5-year CDS spread, the cost of insuring exposure to Argentinian debt and a proxy for fear, remains high at 9321.55 as of May 22.

It remains to be seen whether Argentina’s debt situation will improve in the medium-long term. Argentina’s dollar-denominated bonds have recovered significantly from the severe sell off in late March, but still trade in low territory. As such, Argentina’s future heavily relies upon the attitudes of creditors and whether deals can be brokered. With the US’s recent monetary stimulus helping to keep the global market steady, it is likely that the dollar will reign supreme over emerging currencies in the short-term. Nevertheless, the potential for future US inflation and evolving monetary environments will undoubtedly have an impact on Argentina.


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