Posted by on October 29, 2019 2:09 pm
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“Argentina – ninth national bankruptcy is imminent”

By Angelica Dominguez-Cardoza and Cristoph Trebesch, courtesy of IfW Kiel


As Argentina’s elections were set to begin Sunday, the state is headed for yet another bankruptcy. The government has borrowed nearly $45 billion overseas in just two years. The country’s debt ratio has nearly doubled since 2015 to 80 percent of GDP, with inflation at 50 percent. Given the severe economic crisis and political uncertainty, this debt burden is no longer viable, and Argentina now faces the ninth bankruptcy in its history. A record $57 billion IMF rescue program was unable to avert this worsening crisis.


Since 2015 the Argentine government under President Mauricio Macri has failed to solve the inherited economic problems of a high state deficit, high inflation and high devaluation pressure on Argentina’s currency. On the contrary, it continued the prior policy of excessive indebtedness.


In total, Argentina raised $81.6 billion in foreign currency loans in just four years. “This is a huge sum and represents a significant burden for a newly industrializing country with a GDP of just over $500 billion,” said Christoph Trebesch, head of research at the Kiel Institute for the World Economy, and co-author of an analysis on the country’s financial situation.


The interest on the new bonds is very high at 7 percent on average, with maturities of more than 10 years, and a bond with an unprecedented 100-year maturity was floated in 2017 as well. The debt burden of the state will therefore increase significantly in coming years.


Foreign currency debt service alone will average $25-$45 billion annually by 2024, well over 5 percent of GDP. According to the calculations of the authors, the payments will reach their peak in 2022 at $45 billion. This corresponds to 10 percent of GDP in 2019 (IMF GDP estimate).


The government debt ratio as a percentage of GDP rose from just over 40 percent in early 2015 to 81 percent in August 2019, partly due to the strong devaluation of the peso. It shot up from 20 pesos per US dollar in February 2018 to almost 60 pesos per US dollar in August 2019. The government now has to generate four times more tax revenue than it did in 2015 to repay the same amount in US dollars. In August, Argentina announced that it was restructuring its sovereign debt, with various rating agencies downgrading the country to “default” and interest rates on government bonds rising to nearly 30 percent.


“In view of the severe financial crisis in which Argentina is now, the debt burden is no longer sustainable. The announced restructuring is insufficient. Empirical research shows that simply extending maturities is not enough to bring a debt-ridden country such as Argentina back into solvency. A large haircut is inevitable,” said Trebesch.


Trebesch and co-author Angelica Dominguez-Cardoza criticize the International Monetary Fund (IMF) rescue program, which awarded Argentina more than $57 billion in relief loans in 2018. This makes the rescue package to Argentina almost half of all outstanding loans from the IMF.


“The IMF continues the risky trend of recent decades of extending large bailouts to heavily indebted countries, even though they are not systemically important. So far, IMF loans to Argentina have been used primarily to service private creditors in a timely manner. This could have been avoided if a debt restructuring had been organized earlier,” Trebesch said.


“Given the size of the IMF program, even the unthinkable is conceivable: Argentina could refuse to repay the IMF loan as agreed. If a new, Peronist government were to default on IMF loans, this would be permanently detrimental to the reputation of Argentina and the IMF.”



Angelica Dominguez-Cardoza is a PhD student at Kiel University.  Cristoph Trebesch is head of IfW Kiel’s Research Department on “International Financial Markets and Global Governance.” He is also Professor of Macroeconomics (W3) at Kiel University.