Argentina's public debt is in the news again
Julio C. Gambina[1]
At the end of 2001, Argentina experienced its largest sovereign debt default, amounting to approximately US$100.000 billion, representing two-thirds of the total debt. The remaining third largely corresponded to debt owed to international organizations, with whom the country had never defaulted. Even in 2006, the IMF received advance payments of approximately US$9.500 billion in debt maturities, an attempt to distance the Fund from monitoring the local economy. The 2001 default primarily affected private holders of public debt, a significant portion of whom were based in the country. Social security funds, invested in government bonds, were particularly hard hit. Addressing this default was complex and shaped economic policy for nearly 20 years, with a strong and regressive socioeconomic impact in terms of inequality and impoverishment. Addressing the problem led to debt restructurings in 2005, 2010 and 2016, under different governments[2]And even today there is a remaining balance of more than $2.400 billion pending restructuring.[3]Strictly speaking, since December 1983, the date of the restoration of constitutional governments after the genocidal dictatorship of 1976, all presidential administrations have carried out their "definitive" debt restructurings, which allows us to affirm that public debt is an important structural condition of the local economy.
Since the 2001 default restructurings, there have been various cancellations of interest and principal on the public debt, as well as new rounds of loans, especially during Mauricio Macri's presidency. The result is a debt that, as of the end of 2019, totaled $323.000 billion.[4]90% of GDP according to official sources. A May 2020 report from the Central Bank of Argentina states that:
“During the capital inflow phase between December 2015 and early 2018, approximately 8 out of every 10 dollars entering the country from abroad originated from debt placements and speculative capital. Foreign exchange inflows from public and private debt and speculative portfolio investments totaled USD 100.000 billion during this period. In 2018, following the closure of voluntary credit markets, a sharp reversal in capital flows began, prompting the authorities to turn to the International Monetary Fund (IMF), which disbursed a record loan of USD 44.500 billion.”[5]
The report goes on to say that:
“Throughout the entire period, the formation of external assets (FAE) by residents (colloquially called “capital flight”) tripled, exceeding USD 86.000 billion. Even during the first boom phase and capital inflows, the formation of external assets by residents reached USD 41.100 billion. In the accelerated capital outflow stage, starting in May 2018, FAE reached USD 45.100 billion.”
It is evident that the high level of debt incurred during the last period facilitated capital flight, through debt repayment, profit remittances abroad, and the accumulation of assets overseas. Consequently, it did nothing to improve the population's standard of living, nor did it create a condition for the development of productive activity, job creation, or local economic activity. Therefore, it can be considered "odious debt," regardless of any claims of its illegality or illegitimacy. A noteworthy fact is the IMF's support for the Macri administration, driven more by political reasons—aligning with US foreign policy in the region, particularly its stance against Venezuela and Cuba—than by economic considerations. The debate within the IMF to grant the $57.000 billion loan (only $45.100 billion was disbursed) was resolved based on the US government's hegemonic power in the Board of Directors of the Organization, rather than on the economic and financial logic of the functioning of the Argentine economy within the context of a global economic slowdown.
The IMF disbursements temporarily averted another default by Argentina. However, in the final stretch of Macri's administration, the country began "re-profiling" its debt, a euphemism for postponing overdue public debt payments.
Argentina in default
By August 2019, authorities were explaining the situation as “liquidity stress”[6]Anticipating the inability to meet public debt payments, a situation that persisted even after the change of government at the end of 2019, Argentina nevertheless fulfilled its commitments to the IMF and other international organizations on time. Therefore, the IMF's support for Argentina's ongoing debt negotiations with private creditors is not surprising. The Fund intends to shift the cost of restructuring Argentina's debt onto private bondholders without relinquishing its own position, even if it grants new payment deadlines in the future.
Under the new government, in December 2019, a “solidarity” law authorized the allocation of $4.571 billion from international reserves, which could only be “…applied to the payment of debt obligations denominated in foreign currency.”[7]While negotiations are underway with financial funds regarding a debt estimated at $66.500 billion in principal and interest accruing to approximately $61.000 billion by 2117, the government had anticipated finalizing these negotiations by the end of March. This would have resulted in estimated savings of $41.500 billion, primarily due to a substantial reduction in interest payments, a decrease in the outstanding principal balance, and, most importantly, a grace period covering the entire presidential term. The current expectation of an agreement by August 2020 significantly reduces this estimate, as the original proposal assumed an average present value discount of 39% on the bonds, which currently hovers around 55% of present value after three adjustments to the renegotiation offer that favored external creditors.
The world is watching Argentina's negotiations closely, given the dangerous situation created by the high levels of public debt in most countries of the global system, affected by a recession exacerbated by the coronavirus pandemic. But this is also a time for discussion about the world order and the role of global financial institutions. The IMF seeks to validate its role in this time of crisis without acknowledging its responsibility as part of the cause of the current problems, even before COVID-19. Its old and new prescriptions have contributed and continue to contribute to sustaining an unbearable reality for millions of impoverished people. Argentina's debt jeopardizes fiscal resources and international reserves due to debts assumed, among others, with the IMF, which, contrary to its purposes and statutes, facilitated the inflow of loans for capital flight.
The aforementioned BCRA report is the basis for a thorough investigation into the responsibilities of the private sector and public officials in the public debt fraud. The country is negotiating 20% of its debt with speculative financial funds that are pressuring to stop losing substantial profits, profits facilitated by unscrupulous public officials. These officials secured highly profitable speculative investments during a period of low interest rates in global financial and capital markets. The crime lies with the IMF, the speculative lenders or investors, and the corrupt Argentine officials. This is why the necessary debt investigation is being maintained, while payments are suspended. The social movement is aiming for a debate that can overcome the blackmail of financial creditors, the financial funds, and the IMF. This is the reason for launching a popular campaign for the suspension of debt payments and for carrying out a thorough investigation, building upon the work done by the BCRA and the initial debates initiated by the bicameral commission in Parliament for debt monitoring.[8]
It is worth noting that a debate has arisen regarding the establishment of a wealth tax, which would affect approximately 12.000 taxpayers, representing 0,03% of the total Argentine population. The projected revenue would not reach $4.000 billion, while a similar amount is what Argentina has allocated to debt repayment while negotiating with creditors, all during a period of emergency due to the coronavirus pandemic and a recession that is exacerbating the existing downward trend. The serious issue is the majority's willingness to pay, which, despite the ongoing negotiations, represents a financial commitment that imposes perpetual austerity measures. Indeed, during the first quarter of 2020, according to official reports, $3.279 billion was paid in interest. The same report details payments of $370 million for profit remittances abroad.[9]
Several points need to be considered. The first concerns the foregoing of $3.640 billion that could have been used for other purposes. Of course, for that to be possible, debt payments would have had to be suspended and, naturally, the debt audited with public participation, as demanded by the campaign. At the same time, it would have been necessary to prohibit the transfer of profits abroad within the context of the health and social emergency resulting from the prolonged recession of the local economy.
Is it possible to take another course?
Confirmation of default remains a possibility if investment funds reject Argentina's offer. This would call into question the squandering of substantial resources allocated to debt repayment during this period, as well as legitimize Argentina's unacceptable agreement with the IMF. The widely circulated question concerns the socio-economic impact of a unilateral default by the Argentine government. On the one hand, there is a widely discussed motion in favor of debt relief for countries in difficulty, which has been addressed within international organizations themselves. On the other hand, the unilateral decision to suspend payments needs to be discussed, and this must be accompanied by a broader discussion of the economic order. Furthermore, Alberto Fernández recently told the Financial Times, regarding the current debate on debt and debt renegotiation, that there is a need to "rethink capitalism."[10]In the Argentine president's mind, it is possible to reform capitalism, as happened after the Great Depression of the 30s, alluding to Fordism and Keynesianism, proponents of a "welfare state." This situation was only possible due to the communist threat following the Russian Revolution, and even more so with the formation of the USSR, and especially after 1945 with the establishment of the bipolar world order. The Argentine president is not alone in this reasoning; it is echoed in the speeches of figures such as Pope Francis and Nobel laureates in Economics like Joseph Stiglitz and Paul Krugman. These speeches advocate a return to the capitalism that existed before the conservative restructuring implied by neoliberal policies, those that were tested in South America under state terrorism in the seventies and that Thatcher and Reagan generalized from England and the USA in the 80s of the last century, even more so with the fall of Eastern Europe and the dismantling of the USSR.
The global economic crisis, which has been dragging on for some time, at least since 2007/09, including the great crisis in the US in 2001, has intensified during the COVID-19 pandemic and has opened up a civilizational debate with two privileged paths. One, of a hegemonic nature, advocates liberalization with enormous state intervention in the issuance of currency and public debt to sustain the level of activity of concentrated capital. The role of the central banks of the world's leading capitalist countries is notable in this regard, beyond any form of contemporary warfare—commercial, monetary, or other variations that exacerbate the increase in military spending within the framework of global capitalist hegemony. The other, in the aforementioned sense of the "progressive illusion," manifests itself in appeals for debt "forgiveness" or voluntary contributions from the wealthiest sectors. to the appeal to progressive fiscal and income distribution policies, even to new pacts, such as the "New Green Deal" based on a change in the energy paradigm, but always under the domination of transnational energy companies.
A third path, contrary to the aforementioned debate, involves thinking and acting alternatively by constructing proposals against and beyond the capitalist order. This approach prioritizes democratic demands and structural change. Among these, the demand for a universal basic income equivalent to meeting the needs of the entire population stands out, enabling a debate on its corresponding financing. But beyond this and other demands, this path requires structural reforms in the social relations of production, especially by reducing the working day without affecting the income of the working population. This proposal affects the income of the owning minority and, therefore, fuels social confrontations that transcend theoretical debate and project themselves into the political arena. This path implies changes in property relations and in the management of production and public policies to support another productive and development model, based on self-management and the broadest possible social participation. It is not just about discussing public debt, but about thinking beyond and against the logic of the capitalist regime, in times of deep and widespread recession, aggravated by the coronavirus pandemic.
[1] PhD in Social Sciences, University of Buenos Aires. Full Professor of Political Economy, National University of Rosario. Member of the Crisis and World Economy Working Group of the Latin American Council of Social Sciences (CLACSO). Member of the Board of Directors of the Latin American Society of Political Economy and Critical Thought (SEPLA).
[2] Néstor Kirchner between 2003 and 2007; Cristina Fernández de Kirchner between 2007-2011 and 2011-2015; Mauricio Macri between 2015 and 2019.
[3] Ministry of Economy of Argentina. Graphic Presentation of Debt as of the Fourth Quarter of 2019. Debt pending restructuring, in: https://www.argentina.gob.ar/economia/finanzas/presentaciongraficadeudapublica (accessed on 25/07/2020)
[4] Report cited from the Ministry of Economy of Argentina.
[5] BCRA. Foreign exchange market, debt and external asset formation, 2015-2019; in: https://www.bcra.gob.ar/Pdfs/PublicacionesEstadisticas/Informe-Mercado-cambios-deuda-%20formacion-de-activos%20externo-%202015-2019.pdf (accessed 25/07/2020)
[6] The Chronicler of 28/08/2019, in: https://www.cronista.com/economiapolitica/Que-significa-reperfilar-y-que-diferencia-tiene-con-reestructurar-una-deuda-20190828-0062.html (accessed 25/07/2020)
[7] Law of Social Solidarity and Productive Reactivation within the framework of the Public Emergency. Law 27541, articles 61, 62 and 63, in: http://servicios.infoleg.gob.ar/infolegInternet/anexos/330000-334999/333564/norma.htm (accessed 25/07/2020)
[8] CADTM, in: http://www.cadtm.org/Argentina-Cronica-del-lanzamiento-de-la-Campana-por-la-Suspension-del-Pago-de (accessed 25/05/2020)
[9] INDEC. Balance of payments, international investment position and external debt.
First quarter of 2020, in: https://www.indec.gob.ar/uploads/informesdeprensa/bal_06_2045AAE8C4CE.pdf (accessed 25/07/2020)
[10] The Chronicler, in: https://www.cronista.com/economiapolitica/Alberto-en-Financial-Times-su-destino-a-gobernar-en-default-el-peronismo-y-las-reformas-economicas-que-quiere-20200725-0004.html (accessed 25/07/2020)
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