One Country, Nine Defaults: Argentina Is Caught in a Vicious Cycle
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At midnight Saturday, after months of histrionics, the clock ran out on Argentina.
It had failed to put up the $500 million it owed foreign bondholders and, in so doing, had fallen into default for the ninth time in its history. It’s a staggering number, putting the South American country in an elite league of serial defaulters that includes the likes of Ecuador, Uruguay and Turkey.
The first episode came in 1827, just 11 years after independence. The last three came rapid-fire, one after another, in the past two decades. In between, there were five others of varying size and form, according to Carmen Reinhart, the newly appointed chief economist at the World Bank. Almost all of them were preceded by boom periods, such as when European migrants transformed Argentina into an agricultural powerhouse and one of the world’s wealthiest countries in the late 19th century. Invariably, profligate spending, combined with easy access to capital supplied by overzealous foreign creditors, did the nation in.
“Argentina has a history of borrowing too much with insufficient fiscal and monetary restraints,” said Martin Schubert, founder and chief executive officer of European InterAmerican Finance Corp., who has been investing in the country since the 1980s. It’s “a vicious cycle.”
Here’s a brief look back at each of the nine defaults and a look ahead at what comes next.
After declaring independence from Spain in 1816, Argentina’s economy quickly opened itself to foreign trade. Some historians would later refer to the early 1820s as the nation’s “happy experience,” a period of peace, prosperity and fascination with European aristocracy. That soon changed. Argentina had sold bonds in London to help finance its nationhood. That debt came under pressure when the Bank of England raised interest rates in 1825. Argentina defaulted two years later. It took another 30 years for the nation to resume payments on the debt.
In the late 19th century, Argentina went on a borrowing spree to build trains and transform Buenos Aires into the cosmopolitan capital it is today. London’s Barings Bank aggressively invested in the nation’s railroads and other utility projects. The south of Argentina boomed, too, as sheep farming spread across the Patagonian grasslands and gold prospectors rushed to Tierra del Fuego. That euphoria faded when the commodities bubble burst. The nation halted debt payments, spurring a run on Argentine banks and the resignation of President Miguel Juarez Celman. That November, Barings teetered near insolvency. Argentina emerged from default four years later, buoyed by fresh capital from the U.K.
An influx of immigrants and foreign capital fueled Argentina’s rise to one of the world’s most prosperous countries by the early 1900s. But World War I hit the nation’s economy hard, as did the Great Depression that followed a decade later. Unemployment and social unrest soared. In 1930, a coup brought the military into power, ushering in a period of political instability — eight presidents in two decades — and a policy of import substitution, which closed off the economy and helped trigger a default.
The populist strongman Juan Peron rose to power in 1946 and proceeded to nationalize companies, redistribute wealth and assert greater government control over the economy. The policies he and his wife, Evita, carried out would become Argentina’s dominant governing principle for roughly half of the next seven decades. Initially, they stoked growth and expanded the middle class. But in 1955, Peron was ousted in a coup, plunging the economy into turmoil and leaving the country struggling to keep up with debt payments. The next year, the military junta struck a deal with the Paris Club of creditor nations to avert a larger default.
During Argentina’s Dirty War, the military dictatorship borrowed, mainly from U.S. and British banks, to fund infrastructure projects and state industries. The nation’s foreign debt ballooned to $46 billion from $8 billion. Then commodity prices collapsed again when the Federal Reserve, under the leadership of Chairman Paul Volcker, raised U.S. interest rates to as high as 20% to tame inflation, spurring debt crises across Latin America and the rest of the developing world. Argentina became one of 27 nations, including 16 in Latin America, to reschedule its debt.
A series of failures in the late 1980s to curb inflation — which climbed over 3,000% — triggered another default in 1989 and brought Peronist leader Carlos Menem into power. His government reduced inflation, privatized state companies and lured foreign direct investment, steering the nation from recession to double-digit growth by Menem’s second full year in office. Still, Argentina’s foreign debt surged to more than $100 billion, the result of Menem’s inability to rein in spending. By the time he left, the nation had fallen into recession once more amid rising unemployment, constrained exports and an overvalued peso.
As the brutal recession entered its fourth year, wiping out about two-thirds of the nation’s gross domestic product, Argentines rioted around the rallying cry, “All of them must go!” The country had five presidents in two weeks, all while declaring what was at the time the largest default by a country in history. Payments were halted on $95 billion worth of bonds. That led to restructuring deals with creditors in 2005 and 2010 under Nestor Kirchner and his wife, Cristina Fernandez. Most bondholders agreed to take the 30 cents on the dollar offered, but a contingent led by hedge-fund billionaire Paul Singer held out and demanded full repayment.
Haunted by a legal drama with Singer and other holdout creditors, Argentina defaulted once again, albeit on a lesser scale. Fernandez’s administration missed an interest payment after a U.S. judge ruled that Argentina couldn’t distribute the funds unless Singer’s Elliott Management Corp. and other so-called “vulture funds” got paid on their defaulted debt. That dispute was finally resolved in 2016, when the new president, Mauricio Macri, paid the holdouts so Argentina could regain access to international debt markets.
Pledging fiscal austerity, free-market reforms and a return to growth, Macri pulled in billions of dollars of fresh financing from foreign creditors. His reform agenda quickly stalled in congress, though, and the economy never picked up, leaving the country stuck with a bloated debt tab that it struggled to repay. Officials turned, once again, to the IMF for help and secured a $56 billion credit line in 2018. It was the biggest aid package the IMF had ever handed out, and yet ultimately mattered little. Investors were already convinced by then that this episode too would end badly and were yanking money out of the country at a frantic clip.
Then came the final blow: Alberto Fernandez, a leftist leader who had played a key role in the Kirchner administration, won a primary vote in a landslide last August that all but guaranteed his victory over Macri in the general election. By the next day, traders had pushed the price of the country’s bonds down to less than 50 cents on the dollar, an acknowledgement, essentially, that they knew a default and restructuring were inevitable.
Fernandez and his economic advisers have been negotiating with creditor groups for months. Progress has been slow, though, with the administration seeking to stick creditors with losses of about 70% in the restructuring while most creditors are looking to limit their losses to about 50%.
As talks grind on, risks are mounting for both sides. For investors, the prospect of a drawn-out negotiation means they could be saddled with non-performing, defaulted bonds on their books for months. For Fernandez, there’s the risk that in the wake of Friday’s default, some creditors give up on negotiations and, like Singer did years before, take Argentina to court.
Argentina has struck yet another deal to restructure its debt and regain access to capital markets. This raises several fascinating questions:
- Why do Emerging Market investors always fall back in love with Argentina?
- In the last 50 years has Argentina spent more time solvent or insolvent?
- If you restructure 5 times in 30 yrs and on the 5th you are still restructuring debt from the 1st, isn’t it really just 1 eternal restructuring process?
- Having presided over Argentina’s decline from one of the wealthiest countries on the planet in the ’20s & ’30s to a perennial basket-case, how do Peronists keep getting elected?
- Is Argentina actually an emerging market or a fronter one?
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