While Argentina is not facing a Covid-19 chaos close to what we have seen in Brazil and Ecuador, the country is mired in yet another financial crisis. On May 22, for the ninth time in its history, Buenos Aires failed to pay interest on its federal debts and began a 30-day countdown to another default.
According to President Alberto Fernández, however, nothing really changed on Friday, as the country “has already been in default for months,” blaming the press for ignoring the story and only writing about it now. Indeed, Mr. Fernández’s comments hold water, as Argentina’s latest default is the result of a debt snowball that dates back decades. Last week’s unpaid USD 503 million comes from bonds issued in 2016 by then-President Mauricio Macri, in an attempt to write off another, larger debt.
In all, settling prior liabilities will cost almost USD 69 billion to Argentina’s public coffers. President Fernández is trying to convince creditors to accept new terms of renegotiation.[restricted]
A long list of defaults
Argentina has gone into default many times in its history, and the compulsory re-profiling of short-term notes by Hernán Lacunza in 2019 and Martín Guzmán in 2020 were clearly another instance of this.
With negotiations ongoing on whether this default will extend to international bonds, we looked at the historical record of Argentina’s default-like events and counted a total of nine — though we interpret that only five should be classed as actual defaults.
The first case dates back to 1827. After its 1816 independence, Argentina had an active presence in international capital markets. Amid a credit boom caused by the end of the Napoleonic wars, Argentina and other Latin American countries managed to issue bonds in London to finance their independence struggles.
This credit boom ended in 1825 when the Bank of England raised its discount rate to end a run on its reserves. This monetary tightening resulted in a stock market crash, banking problems, and recession across England and continental Europe. In a few months, that crisis expanded to Latin America. Argentina went into default in 1827 and only resumed payments 30 years later.
The second default came with the “Panic of 1890.” The main cause was the near-bankruptcy of the House of Barings investment bank due to an excess of credit given to Argentina. That credit — which the country took during Julio Roca’s presidency — was used to build trains and modernize Buenos Aires, in a bit to transform it into the “Paris of South America,” with broad avenues, parks and a modern port, given Argentina’s massive growth during its agro-exporting model years.
At the time, Argentina became the fifth-most indebted country in the world, with 11 percent of all London-based bond issuances between 1884 and 1890 aimed at raising debt for the country. The same was true for between 40 to 50 percent of issuances outside of the United Kingdom. Meanwhile, the U.S. had a fraction of Argentina’s debt, despite having a population 20 times larger. What took place in the 1880s was a historically unprecedented capital inflow to an emerging market such as Argentina.
That irrational exuberance becomes evident in retrospect when looking at Argentina’s current account deficit of the time: around 20 percent of GDP. Argentina defaulted on GBP 48 million, around 60 percent of all the debt defaulted in the world in 1890.
Argentina’s third default came in 1982, amid what was, after the 1929 stock market crash, the biggest debt crisis of the 20th century. Dozens of Latin American and African countries defaulted, but with a twist: instead of defaults on bonds, these were defaults on banking loans.
Argentina’s 1976-1983 dictatorship abused the liquidity boom caused by petrodollars. For the first time since 1930, there was international credit for emerging markets, and Argentina moved from a total foreign debt of USD 7 billion in 1976 to one of USD 45 billion in 1983, while GDP barely increased in the same period.
The spark was the strong rise in U.S. interest rates that ended up pushing Mexico into crisis. On August 16, 1982, Mexico said it could not pay interest maturities on its USD 80 billion debt. By October 1983, 27 countries owing USD 239 billion were undergoing defaults and restructurings. Among them, 16 were from Latin America, with Mexico, Brazil, Venezuela and Argentina totaling 74 percent of that soon-to-be-restructured debt. Approximately USD 37 billion was owed to the eight biggest U.S. banks, a sum equal to 147 percent of their capital reserves at the time. The situation in Argentina was only normalized in 1992, making use of the U.S.’ Brady Plan.
The fourth episode was that of 2002. To congressional applause, transitional President Adolfo Rodríguez Saa announced in December 2001 that Argentina would suspend its foreign debt payments. Only nine years after the Brady Plan, Argentina’s debt amounted to twice as much as in 1992. As a share of GDP, it soared from 50 percent in the 1990s to 200 percent in 2001. Those rising debt levels had a lot to do with the recession that started in 1998 and the free fall of 2001. The International Monetary Fund (IMF) has been accused of being responsible for this crisis, but it was ultimately down to the failings of Argentina’s political class.
The fifth episode starts at the end of Mauricio Macri’s government in August 2019. Mr. Macri had come out of default in 2016 but was back in serious debt trouble at record speed. He resorted to the IMF in May 2018 and suffered an additional loss of confidence after being defeated in the 2019 primaries. Incapable of rolling over short-term dollar notes (LETES), Economy Minister Hernán Lacunza unilaterally modified the date of their capital payment. That problem is still ongoing, with Martín Guzmán repeating a similar credit event earlier this year.
What can we conclude from all this?
Argentina has been spending beyond its means for 200 years, regardless of which political party is in charge, even during military rule. That expenditure was very often financed through debt. And while defaults came with some haircuts on occasions, it is ultimately through taxation that these debts are paid. Argentinian politicians’ favorite tax has always been inflation, which has destroyed the value of the currency. From 2001 to now, the Argentinian Peso has lost 98 percent of its value when compared to the U.S. Dollar, made all the more damning when we consider the greenback has lost value itself during that period.
Argentina is now counting down to another default that may get even worse, regardless of whether negotiators come to a deal in the next few weeks.