How a Great Power Falls Apart
Decline Is Invisible From the Inside
How President Alberto Fernández handles Argentina’s foreign debt crisis will define his legacy. When he took office in December 2019, the South American country was already in the midst of an economic meltdown and dangerously close to default. Fernández took emergency measures to alleviate the crisis: he tightened existing currency controls to preserve dwindling foreign exchange reserves, partially froze pensions and salaries, and increased taxes to refill the government’s empty coffers. His government also started negotiations with the country’s creditors with the aim of reducing and deferring debt repayment. But even with a favorable agreement, which is far from guaranteed, Argentina faces an uncertain economic future.
Over the past two years, the value of the peso has plummeted, and the economy has suffered from a serious recession. Fernández blames his pro-market predecessor—the businessman-turned-politician Mauricio Macri—for the current situation. Indeed, foreign debt increased markedly under Macri, ballooning from 50 to 90 percent of GDP. The lion’s share of this debt belongs to the International Monetary Fund. In 2018, the IMF granted the Argentine government a $57 billion bailout—the largest in the institution’s history—of which it paid out $44 billion. Unfortunately, the loan did little to stop the crisis, since private investors continued to flee, skeptical of the country’s capacity to meet its debt obligations.
Fernández has pledged to reduce Argentina’s debt burden and to plow the savings into social programs—a promise he hopes will differentiate him from Macri. This situation smacks of déjà vu: Fernández was President Néstor Kirchner’s chief of staff during the 2005 debt restructuring that followed Argentina’s 2001 economic collapse and default. Back then, Kirchner forced his private creditors to accept a 70 percent haircut and severed ties with the IMF, after repaying the institution in full. Fifteen years later, Fernández promises to repeat this accomplishment and to “put Argentina back on its feet.”
Invoking the 2005 restructuring process might be politically expedient for Fernández, but trying to recreate it would be a mistake. Kirchner could afford to be harsh with private creditors because the economy he oversaw was booming: high commodity prices allowed him to implement redistributive policies and maintain fiscal surpluses with no need for external funding. Plus, in 2005, the holders of defaulted bonds hadn’t received payment for nearly four years, which made them more inclined to accept whatever Kirchner offered.
Cristina Fernández de Kirchner has once again staked out an extreme position toward Argentina’s creditors.
Argentina is in a very different position today. After more than a decade of economic stagnation and large fiscal deficits, the government’s coffers are depleted. As a result, private creditors may be less flexible, knowing that Fernández can’t afford to go without international credit for long. The president’s hard-line rhetoric no doubt reflects his precarious political position. His government is divided into centrist and leftist factions, the latter led by Fernández’s vice president, Cristina Fernández de Kirchner, who is Néstor Kirchner’s widow and a former president of Argentina herself. Although she faces a string of corruption allegations, Fernández de Kirchner remains an extremely powerful figure, with allies in key positions throughout the parliament and the Fernández administration. During her presidency, from 2007 to 2015, she took a hard line against what she described as “vulture funds”—bondholders who, by holding out and refusing to accept debt restructuring, sought to overturn the deal her husband negotiated in 2005. Her intransigence kept the country locked out of international financial markets for a decade, but it bolstered her popularity among many at home.
As Fernández’s vice president, Fernández de Kirchner has once again staked out an extreme position toward Argentina’s creditors. In a February speech she gave in Cuba, Fernández de Kirchner criticized the IMF for supporting the Macri government and demanded that the institution accept a reduction on its own debt, something the IMF charter explicitly forbids. To be sure, the vice president’s harsh statements toward creditors might be part of the government’s negotiating strategy, with Fernández de Kirchner playing the “bad cop” to Fernández’s “good cop.” But even so, her influence over the government worries bondholders and could prevent both sides from finding their way to mutually acceptable terms.
Restrained by his dependence on Fernández de Kirchner and her leftist camp, Fernández has revealed little about his plans to renegotiate the debt. As soon as he took office, he visited Berlin, Paris, and Rome to garner support before beginning talks with the IMF. (He even asked his compatriot Pope Francis for help in softening up Argentina’s creditors.) His government’s offer to private bondholders—which will be presented later this month—will probably ask for a reduction of between 30 and 40 percent on the debt and a postponement of payments for a few years to give the economy time to recover. Fernández also expects the IMF to reschedule Argentina’s debt payments without imposing any of the structural reform requirements that typically accompany deals of this kind.
Whether the IMF will meet this expectation remains unclear. The fund could still demand strict reforms to ensure that Argentina is able to honor any obligations that remain after a debt-restructuring deal. (Under Fernández’s current economic plan, Argentina won’t achieve a fiscal surplus until 2023 at the earliest.) But so far at least, the IMF’s Managing Director Kristalina Georgieva, who assumed office in October 2019, has been receptive to Argentina’s requests. Like Fernández, she inherited this problem from her predecessor, Christine Lagarde. And because the failed 2018 bailout of Argentina has tarnished the IMF’s reputation, Georgieva is likely eager to put this embarrassment behind the fund. On February 19, the IMF called Argentina’s debt burden “unsustainable” and urged bondholders to make a “meaningful contribution” toward a solution. U.S. President Donald Trump’s administration, which strongly supported the IMF bailout, has also expressed solidarity with Fernández in bilateral meetings with Argentine officials.
Alberto Fernández has revealed little about his plans to renegotiate the debt.
But even with the support of the IMF and the United States, Argentina likely faces a long and contentious negotiation with private creditors over debt reduction and deferral—one that will probably extend beyond the government’s self-imposed deadline of late March. With mounting payments in April and May, Argentina might well enter a partial default during the negotiations. Even more worrying, vulture funds similar to those that sought to overturn the 2005 debt restructuring deal appear to be purchasing Argentine bonds and preparing for litigation in New York. As they did in the decade after 2005, U.S. court battles could keep Argentina out of financial markets even if the debt renegotiation is relatively successful.
Fernández’s problem is both economic and political. If he gives in too much to creditors’ demands for austerity, he will have fewer resources to boost public spending and stimulate Argentina’s battered economy. More important, capitulating to the country’s creditors might alienate Fernández’s powerful vice president and her leftist supporters, whom he needs to govern. At the same time, if his government insists on a hard-line stance, it could fail to reach a deal with creditors in time to prevent a default. That would further isolate Argentina from the global economy, destroy what is left of the country’s international credibility, and deter potential foreign investors.
But even a successful debt restructuring won’t solve Argentina’s long-term economic woes. The country’s frequent debt crises are not a cause but a consequence of structural problems: lack of trust in the peso, low competitiveness, and large fiscal deficits. The public sector is bloated and highly inefficient, and Argentina’s agricultural exports—the most internationally competitive area of the economy—are too small to provide the hard currency the country needs to service its debt, finance its imports, and meet Argentines’ large demand for U.S. dollars. Unfortunately, the drastic fiscal and economic adjustments needed to correct this situation would be politically and socially unpopular with those on the receiving end of government benefits.
Even a successful debt restructuring won’t solve Argentina’s long-term economic woes.
Fernández has promised to boost Argentina’s exports to alleviate this imbalance. So far, however, he has resorted to old recipes that have failed many times before: protectionism, currency controls, and money printing. These might work as stopgap measures during an emergency, but they will by no means solve the Argentine economy’s fundamental problems. To reassure his creditors and his constituents, Fernández must show both the willingness and the capacity to set a more sustainable path. Three months into his term, however, he has shown neither. Argentina’s private creditors know this and have refused to accept a haircut now only to be forced into another renegotiation a few years later. The slowdown in the global economy due to coronavirus has only increased concerns over Argentina’s ability to repay.
Until Argentina finds a way to reduce its deficits and increase its international competitiveness, the country’s addiction to foreign debt will remain unchecked, and sooner or later, South America’s second-largest economy will be back where it is right now.