Reference no: EM133143618

Argentina on the Edge of the Financial Crisis - again

As an emerging market, Argentina in the 1990s enjoyed economic growth, but much of the development was funded by over-indulgence in borrowing in international capital markets. The country accumulated sovereign debt liabilities on a colossal scale, issuing over a hundred types of bonds in numerous currencies and numerous jurisdictions. Many were issued to institutional investors, and many were issued to private investors, including ordinary Argentinians. The IMF became involved, attempting to structure rescue packages, but these had little success.

Unable to meet repayments, Argentina defaulted on nearly $100 billion in sovereign debt in 2001, and the currency was devalued. Agreements with 93% of the bondholders were achieved in 2005 and 2010, by which they would receive about 30% of the face value, in a restructuring 'haircut'. This could have led to a resolution of the country's debt problems. However, a number of 'holdout' creditors, amounting to about 7% of the total, were outside these agreements. These holdout creditors were hedge funds, led by NML Capital (owned by Elliott Management), which had bought Argentine bonds following the country's financial crisis. These creditors, referred to as 'vulture' funds, mounted numerous legal battles for full payment. These battles extended over the following 12 years, but the holdouts were confident in the strength of their legal case. They obtained numerous awards of damages in the US civil courts, although these were not paid by Argentina's government.

For millions of Argentinians, the consequences were disastrous: their savings were wiped out, poverty levels soared, and unemployment was in the range of 20%. The crisis was both economic and social. It also became political. For twelve years, from 2003 to 2015, the country was ruled by presidents from the leftist populist Peronist party, which is descended from the post-Second World War era of extreme nationalism. Under the presidency of the late Nestor Kirchner, from 2003 to 2007, and then under Cristina Fernandez de Kirchner, from 2007 to 2015, Argentina's public finances were in a precarious state, while the demands from bondholders to be repaid dragged on.

The political tide turned with the election in 2015 of a new center-right president, Mauricio Macri, who promised to settle with the holdout creditors and to restore confidence in the economy. An agreement with four leading holdout hedge funds was reached, worth a total of $4.65 billion. The price was high, but the country could then access international capital markets. Still, he faced an uphill task in the changing global financial climate. The US dollar was strong, and rising US interest rates were in the pipeline, spelling difficulties for emerging markets. Argentina's currency, the peso, was falling perilously, and inflation was climbing. The country was in recession. The agriculture sector had been hard hit in 2018 by the worst drought in decades, while the cost of energy imports was rising. The beleaguered Argentine population was still suffering from 20% unemployment, and one-third of the population was in poverty.

In 2018, Mr. Macri went back to the IMF to request a standby funding of $50 billion, which was soon raised to $56 billion. The president's strategy of returning to the IMF had the immediate effect of sending people onto the streets to protest. Many Argentinians remained convinced that the IMF was the ultimate cause of their woes in 2001, which many felt left them in a situation similar to being a 'colony'. Years of austerity measures were blamed on the IMF.

With a presidential election looming in late 2019, Mr. Macri needed, first of all, to stabilize the currency. The backing from the IMF would help in the eyes of global investors. The IMF has appreciated that a gradual approach to reducing the budget deficit is called for. While reducing public spending is unpopular, especially in an election year, he was concerned that he must maintain the confidence of investors by reducing the budget deficit. Investors, for their part, were likely to be worried that if he cannot promote economic recovery, the voters would turn again to a populist government. While former president, Cristina Fernandez de Kirchner, remained popular among the Peronist supporters, many saw Mr. Macri as the best hope for responsible financial governance. When the election took place in October 2019, the Peronist candidate, Mr. Fernández, won 48% of the votes, to Mr. Macri's 40%. The victory saw the return of Ms. Fernández de Kirchner as Vice President. Argentinians have hoped for new stability and a better future, but the economic woes that had taken their toll on society ultimately led to the political downfall of Mr. Macri.

1. To what extent did Argentina's government mismanage its sovereign debt?