Crying for Argentina

On the brink of sovereign debt default

Argentina is hovering on the brink of history’s worst sovereign debt default. This Latin American country cannot service its $132 bn in public debt and the probability of an outright default is sending tremors through neighbouring countries like Brazil. To deal with this emergency, its government reopened negotiations with the International Monetary Fund which had earlier decided to withhold a $1.3 bn loan installment. The IMF did so as it was apparently frustrated by Argentina’s inability to rein in spending, and now, it will most certainly drive a hard bargain before a bailout package is cobbled together. This would include an agreement on how Argentina intends to close the budgetary gap or comply with a zero-deficit budget plan. It is indeed ironical that Argentina has to contemplate austerity measures despite being in recession for the fourth straight year. But this is apparently the “price” to pay for winning the confidence of international bankers and to secure a rescue package. The policies to be followed — like higher taxes and reduced government spending — aren’t necessarily in its best interests and may well intensify the recession besides triggering off domestic social and political upheaval.

Argentina’s woes have also led to adoption of short term measures to halt the flight of pesos into dollars. Capital restrictions have been imposed on how many dollars can be taken out, although unofficial channels exist to facilitate capital flight. According to estimates, Argentina’s banks had dollar deposits of $49 bn versus those in pesos amounting to $21 bn, a month ago. With citizens nervous about the peso, the government clearly does not have the means to check a run on the national currency. The denouement of its debt servicing travails will most certainly change its decade-old regime of full convertibility of one peso for one US dollar. That is no more sustainable. In fact, a de facto devaluation of the peso is already underway. Argentina watchers argue there are two possible outcomes, both of which are equally painful: a massive devaluation with default or voluntary dollarisation with default. Meanwhile, faced with a desperate financial situation, the government has dipped into the pension funds till — which amounts to $3.5 bn in bank accounts — to pay the wage bill of public servants. The coming days are crucial for the Argentinian economy.