Argentina went into technical default last Friday when the 30-day grace period expired on $500 million interest due on $65 billion owed to private creditors. The forecast is that many other countries, including the republic of Congo, Zambia, and possibly El Salvador, Iraq, Sri Lanka, and Brazil will not be able to pay what’s owed as the coronavirus pandemic translates into a coronavirus economic crisis: Money is rushing out of the countries, exports are collapsing, and commodity prices are plummeting. That’s why how things play out for Argentina may be so consequential. It’s a harbinger for other countries in debt.
It may help explain what has puzzled many about how the creditors negotiated. They played hardball. After Argentina put an offer of the table near the limit of what it said it could pay — an analysis of sustainability backed by the International Monetary Fund and a host of economic experts (including me) who signed a letter published in Project Syndicate — the largest creditor group made a counteroffer that was so beyond what the country could afford it was laughable. After the first deadline had passed on May 8, it countered with another offer, which was still way beyond the kind of deal that the IMF said was sustainable. (Full disclosure: Martin Guzman, Argentina’s economy minister, worked with me at Columbia University.)
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The context, the coronavirus pandemic, made such obdurate behavior harder to understand. What’s at stake was made clear by the headline in a New York Times op-ed, “Lives Depend on Argentina’s Debt Talks.” Senator Elizabeth Warren of Massachusetts captured the spirit on Twitter: “With COVID-19 worsening an already weak economy, this is no time for Wall Street creditors to exploit any country struggling to deal with debt burdens. A fair deal will help save more lives.”
Argentina may go bankrupt if it doesn't restructure its debt. With COVID-19 worsening an already weak economy, this is no time for Wall Street creditors to exploit any country struggling to deal with debt burdens. A fair deal will help save more lives. https://t.co/TKnTpQN69v
— Elizabeth Warren (@SenWarren) May 16, 2020
Perhaps the creditors managed to put all sense of humanity aside as they thought about how much of their money might be at stake: If they’re soft on Argentina, it may bode poorly for all those negotiations with other countries down the line.
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Beyond the pandemic, the situation in Argentina is different from typical negotiations in ways that may be disconcerting to creditors. The IMF and Argentina have been working together closely, unlike in the past. IMF experts noted that even before the coronavirus pandemic, Argentina’s debt was unsustainable. The country couldn’t pay what was due. Increasing taxes, in an attempt to squeeze more money out of a stone, is counterproductive and dangerous. It would lead to a massive contraction of an economy already suffering from recession, making it even less likely that Argentina could make future debt payments. That’s why there’s a consensus not only that the debt must be restructured — including a grace period for growth, lower interest rates, a change in maturity, a reduction in principal — but also that the restructuring itself has to be sustainable. It doesn’t do anybody any good to have another debt crisis five years down the line, which has been the standard course of debt restructurings in the past because of short-sighted market demands.
This time is different, too, because the IMF and Argentina have broadly agreed on what a sustainable debt restructuring would look like, based on reasonable economic forecasts — admittedly clouded by the uncertainties of COVID-19.
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Argentina needs room to breathe, and that entails postponing payments. The question is, how to value a dollar today with a dollar later. Everyone agrees that a dollar in the future is worth less than a dollar today — that’s called the “time value of money.” For example, if the creditors took a dollar and put it in, say, a 30-year treasury bond, in 30 years they would have almost $1.50, fifty percent more. So paying something for postponing a payment makes sense. But the creditors are, in effect, not asking — in this example — for 50 cents more, they’re asking for $15 more!
Even if we discount future payments at three times the rate they could have received on a T-bill rate, the original creditor offer entailed Argentina paying far more than 100 percent of what they owed. If reports about the revised offer they made last week are correct, they were still demanding close to 100 percent of what is owed.
In the context of the pandemic, it is both short-sighted and inhumane for creditors to play the usual games in which they try to pry as much as they can from hapless debtors. Ironically, the big bond funds are among the biggest holders of emerging-market debt and stand to lose the most. And like it or not, it will conjure up longstanding images of heartless financial markets, with potentially distasteful and dangerous political ramifications, especially likely in this era of populism, authoritarianism, and political instability.
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As it is, developing countries and emerging markets face enormous challenges in this pandemic: Their citizens are in poorer health; housing and working conditions make it more difficult to maintain social distancing; health facilities are less capable of responding to the patient surges that accompany the pandemic; and the countries as a whole don’t have the financial wherewithal to mount the kinds of efforts the United States and Europe have employed to combat the economic effects of COVID-19.
Argentina is right to reject unsustainable restructuring. And the creditors are wrong to try to strike the fear of God — or at least of default —into Argentina’s heart to make the nation an example to all debtor countries in trouble because of COVID-19. It’s an unsavory ploy to induce nations to fall in line and agree to whatever harsh terms creditors demand.
The creditors need to bargain in good faith, taking into account the reality of COVID-19 and those constraints. It’s a grim reality, to be sure, but it’s a reality they must face.
Joseph E. Stiglitz is university professor at Columbia University, winner of the 2001 Nobel Memorial Prize in Economic Science, and former chief economist of the World Bank.