With the economy shrinking, the currency tumbling and poverty rising, the country’s debts had become impossible to sustain
SHORTLY AFTER coming to power in December last year, Alberto Fernández, Argentina’s president, said the country was in “virtual default”. . In April his government delayed payments on dollar liabilities issued under Argentine law. And on May 22nd the republic missed a deadline to pay $503m in interest on dollar bonds issued under New York law. It marked Argentina’s ninth default since independence in 1816. The virtual became real.
But the government seems confident that its latest default will prove brief and “soft”. Its efforts to persuade creditors to swap their bonds for new, less onerous securities would continue until June 2nd, it announced. “The question is not if we get a deal, but when,” said one source close to the president. “Call this an impasse, a soft default if you wish, but a final settlement is in the making.
This was not an enticing offer to creditors. Deferred payments are worth less to investors than early payments, and doubtful payments are worth less than certain ones. If investors could be sure that Argentina would keep its promises, they would discount future payments at a modest 0.5-1% annual rate, equivalent to what they could otherwise earn on risk-free American Treasury bonds. But lending to Argentina is anything but risk-free.
The new optimism reflects an important shift in command and control over the past week. Mr Fernández initially left negotiations in the hands of his young economy minister, Martín Guzmán, who worries that early repayments will impede the economy’s recovery . If creditors discount Argentina’s future promises at excessively high rates, they must think the country is at risk of another default. But if that is so, then presumably the government needs more debt relief not less.
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