By Ryan Dube and Santiago Pérez
Argentina defaulted on sovereign debt for the ninth time in its history, as Latin America's third-biggest economy grapples with a new cycle of economic contraction, runaway inflation and a hard-currency squeeze exacerbated by the coronavirus pandemic.
The cash-strapped country officially entered into default on Friday after failing to make a $500 million interest payment on foreign debt.
The default is Argentina's third this century as the government of nationalist President Alberto Fernández failed to reach a deal with bondholders to restructure about $65 billion in foreign debt. The debt includes bonds issued as part of previous restructurings after the country defaulted in 2001.
The government and foreign bondholders are expected to continue talks beyond Friday, hoping to avoid a messy outcome.
"Nobody involved in this process would be well served by a hard default, " said Hans Humes, the head of New York-based hedge fund Greylock Capital, a creditor involved in negotiations with Argentina, referring to a default resulting in lawsuits and no negotiations. Argentine debt is held by a variety of hedge funds and managers, including BlackRock Inc. and Pharo Management LLC.
Although Argentina's debt default is unlikely to spark financial turbulence in Latin America, Fitch Ratings expects a record number of sovereign defaults this year as the pandemic roils the global economy. In April, Ecuador, a cash-strapped oil producer, delayed debt payments until August as it was battered by one of Latin America's worst coronavirus outbreaks. Lebanon defaulted in March for the first time.
Argentina has been looking to drum up support for its restructuring proposal as creditors have faced pressure to provide poorer countries with debt relief due to the global downturn. But its woes aren't new. The country has suffered recurring political and economic crises marked by devastating devaluations, bank runs and financial market collapse. Insolvent governments, unwilling to cut public spending, often opted to print money or borrow dollars.
"For creditors, the idea that Argentina is pushing is hard to digest: that the country is a victim of the coronavirus and of greedy creditors, " said a former government official. "Rather, it seems to want to take advantage of the pandemic to do what it always does, which is not to pay its debt."
Finance Minister Martín Guzmán said Friday that the government was working to amend its offer to creditors. The price of Argentina's $4.25 billion due in 2028 has risen steadily on hopes of an agreement with creditors, trading at 32.50 cents on the dollar Friday from about 24 cents in early May, according to analytics service Advantage Data Inc.
"Of course Argentina's confidence has been damaged," Mr. Guzmán said. "Restoring confidence will take time. It will take persistent efforts."
"We want to start from a point where we redefine our commitments in ways that can be fulfilled, because we will fulfill them," he said in an interview.
This time, because of a sharp drop in global demand for the commodities that Argentina exports, a default risks fueling Argentina's economic meltdown. The country's gross domestic product fell almost 12% in March. Unless resolved quickly, economists say it would lead to more pressure on the peso due to a hard-currency shortage. The country's official exchange rate is currently about half of what Argentines have to pay to buy dollars in the black market. Such distortion discourages exporters, who are forced to sell the dollars they earn at an artificially low exchange rate.
It would also drive inflation, already one of the world's highest at 46%, by fueling money printing to finance government spending. Private businesses risk losing access to financial markets.
"Entering another default restarts the clock on another crisis cycle," said Jimena Blanco, a Buenos Aires-based economist for consulting firm Verisk Maplecroft. "The outlook will become very negative, very quickly."
Lowering Argentina's debt burden has been a priority for Mr. Fernández, a member of the Peronist movement who took office in December. His popularity has surged because of the strict social-distancing measures that his administration implemented to contain the pandemic.
A recent survey by local pollster Poliarquía said 60% of Argentines want the government to reach a deal with creditors, recalling the economic hardship caused by the devastating hard default of 2001.
"No one wants a default," said Sergio Mohadeb, a 39-year-old lawyer in Buenos Aires. "We have to try to reach a fair deal."
Government officials in Buenos Aires and bondholders in the U.S. and other countries have been negotiating by video conference, unable to meet in person during the pandemic.
"It is different than to have meetings in person to person. It's a different feeling," said Mr. Guzmán. "But with time it has been getting better and now it is working well."
Mr. Fernández called the debt unsustainable after it rose sharply under his predecessor, Mauricio Macri.
Mr. Macri took on tens of billions of dollars in foreign debt to plug a large budget deficit that he inherited from past Peronist administrations, hoping to gradually narrow a fiscal gap, while improving Argentina's business climate to attract foreign investors. But in 2018, Argentina was hit by a currency crisis, forcing Mr. Macri to seek a bailout from the International Monetary Fund.
Argentina owes $44 billion to the IMF, which has also said the country's debt is unsustainable. The fund called on private creditors to make a "meaningful contribution" to restoring debt sustainability.
The government's proposal would give Argentina about $40 billion in debt relief by issuing new bonds with lower interest rates and longer due dates. It also included a three-year freeze on payments, pushing back any debt payments until near the end of Mr. Fernández's term.
Bondholders, including some of the largest money managers in the world and small retail investors, rejected the offer, saying it puts an unfair burden on them while the government has yet to provide a long-term plan to restore financial stability. They also want Argentina to address how it will repay the IMF, which has higher priority of repayment.
Bondholders with debt restructured in 2005 and 2010 also want better treatment because they already took losses, says Arturo Porzecanski, an American University economist who closely tracks Argentina.
"They say, 'We already gave, you should treat us differently... We should just get a half inch haircut. Not a scalping like you are trying to give us again,'" he added.
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