Argentina continues to struggle with recession and a mounting debt crisis. The country has been on selective default for a few months, and is battling to avoid a broader default. It has been trying to find a workable solution both with its private creditors, with bilateral creditors through the Paris Club and with the IMF, by proposing a comprehensive and consistent debt restructuring process. However, this has resulted in little success to date. On top of this already complicated situation, Argentina is now facing the economic consequences of the Covid-19 pandemic.
That is why CSOs across the world are writing to the members of the Paris Club backing Argentina's call. “A substantial debt restructuring in Argentina, with fair burden-sharing by all creditors, is imperative in order to address the profound social and humanitarian crisis affecting vast parts of the country’s population” reads the letter, which has been signed by 40 organisations worldwide.
Before the Covid-19 outbreak, the poverty rate was already as high as 38 per cent. According to the Social Debt Observatory in the Catholic University of Argentina (UCA), the combination of the lockdown and the pre-existing financial crisis in the country has provoked an increase in the poverty rate that could have already reached 45 per cent of the population. As food insecurity increases, threatening the survival of many, a decision from creditors to ease the economic recession has become urgent and necessary.
In this context of humanitarian crisis, the standoff between Argentina and its creditors continues with no end in sight. The Fernandez administration is pursuing a strategy focused on achieving debt sustainability consistent with a gradual adjustment that protects the most vulnerable in the country. In its latest assessment of Argentina, the IMF implicitly backed this strategy. The Fund warns that “Argentina’s debt is unsustainable”, highlighting that “there is virtually no scope for debt service payments to private creditors between 2020-24” and calls for “debt relief” from private creditors.
Argentina launched an offer to restructure US$ 65 billion of external debt based on these parameters. The offer includes a three-year grace period, a 5.4 per cent reduction in the face value of the bonds and a 62 per cent reduction of interest payments. The proposal aims to provide fiscal space in the short run, while reducing long-term financing needs.
While the offer looks generous given the uncertainty caused by Covid-19, private creditors have rejected it. As a result, on April 22, Argentina skipped a payment of US$ 500 million. Without an agreement before May 22, the country will be in official default. This will open the door for renewed litigation against the country by vulture funds. These funds have already bought controlling stakes in specific series of bonds to derail the negotiations and force the government to pay in full regardless of the human and social consequences for the population of Argentina.
Furthermore, Argentina faces negotiations with the IMF to restructure its US$44.1 billion of outstanding debt with the Fund, and bilateral debt negotiations with the Paris Club. On May 5 Argentina missed a payment to Paris Club creditors of US$ 2.1billion.
Compared to its private and multilateral debt, Argentina’s outstanding bilateral debt towards the Paris Club countries does not represent a significant part of its overall debt. However, Argentina is not in a position to meet the USD 2.1 billion due in 2020. Until May 2020, Argentina had been paying down its bilateral debt as scheduled since it was renegotiated in 2014 by the Club. This was despite the prohibitive terms of the agreement which did not allow for any reduction of the principal and imposed a very high nine per cent penalty interest rate.
Reaching a restructuring agreement with Paris Club creditors could help pave the way for a broader restructuring by its private and multilateral creditors. We and our CSO partners who have signed today’s letter believe that Argentina is addressing the Paris Club with a reasonable and vital request for a debt restructuring, including rescheduling and extension of its repayment period, and a reduction of its interest rates. It is the responsibility not only of the Argentinean Government, but also of its creditors, to grant fairer conditions that would allow the population to tackle this economic and humanitarian crisis.
In this unique and exceptional moment in history and, as the Argentinian case painfully illustrates, the absence of - and the need for - a comprehensive international legal framework for sovereign debt restructuring is more obvious than ever. This shortcoming in the current international financial architecture, which should be urgently addressed by the international community, should not in the meantime prevent distressed economies from protecting their people and providing for economic recovery during the crisis.