Warning: Argentine Default Imminent

Warning: Argentine Default Imminent
The Central Bank of Argentina in Buenos Aires, Argentina, on Aug. 20, 2019. Ricardo Ceppi/Getty Images
Fergus Hodgson
Shortly after Alberto Fernández’s presidential inauguration in December, S&P Global downgraded Argentina’s sovereign debt to “selective default.” His new finance minister says the socialist government will continue debt payments during renegotiation, but credit-rating agencies and anyone following Argentina’s tumultuous economy know better.
Argentina enters 2020 with $332 billion in debt. This includes loans from the International Monetary Fund (IMF) and $148 billion owed to private bondholders. The rating agencies downgraded Argentine debt because of the new government’s decision to delay payment on $9.1 billion of Treasury bills. This already constitutes a technical default—a distressed-debt exchange—according to Fitch Ratings criteria. A further $64 billion comes due in 2021.

Starting on the Wrong Foot

Repaying the debt would be difficult for any new administration, given Argentina’s horrendous policy landscape mired by cronyism, criminality, protectionism, and monetary instability. In Latin America, only Cuba and Venezuela stand out as more anti-capitalist than Argentina, which was ranked by the Fraser Institute as 146th out of 162 nations for economic freedom.

Inflation is above 55 percent, and the economy contracted 3 percent in 2019. Over the past four years, 21,500 small and medium enterprises (SMEs), a pivotal source of employment, have shut down. This has led to an official 10.1 percent unemployment rate, and roughly half of the economically active population works in the informal economy. In addition, Argentina continues to scare away capital; $72.2 billion has left since 2015.

To be fair, Fernández inherited many problems from the Mauricio Macri administration (2015–2019). However, he also inherited incremental improvements from Macri: trade agreements with China and the European Union, the entry of low-cost airlines, and an end to the fixed exchange rate. Macri’s infrastructure investment brought an end to regular power outages. His tenure saw improved financial transparency and more reliable economic data, at least in contrast to the previous administration of Cristina Fernández de Kirchner, now Fernández’s vice president.
The outgoing government also made an attempt to reverse capital flight by incentivizing Argentines to report their assets outside the country. In 2016, Macri offered a tax amnesty to Argentines with money in foreign accounts: a flat tax rate of 15 percent in exhange for declaring what they had stashed abroad. This generated badly needed tax revenue.

Enter the Peronista President

Fernández inherited this foundation of at least a meek turnaround. He could have built on the small successes by accelerating tax and regulatory reform to foster SMEs—if only. Instead, this man harks back to the disastrous Peronista movement, the union-dominated legacy of Juan Domingo Perón, who held the office in 1946–55 and 1973–74.
The new socialist government is abruptly ending any business-friendly policies of its predecessor. To halt rising unemployment, the Fernández administration is simply forcing businesses to hold on to their employees, ignoring economic rationale. One of its first measures, a special executive order, declares that any Argentine laid off from his job in the next 180 days will receive double the normal severance package.

The impact is obvious. SMEs will be reluctant to hire anyone at all due to the increased burden, at least not on the books. The new government is hamstringing the very businesses key to any economic revival.

Argentine Central Bank President Miguel Pesce claims the administration’s policies will bring down inflation and increase economic growth. The central bank will lower interest rates—expanding the money supply—while a “social contract” between government, labor unions, and businesses will magically produce lower inflation. Pesce has declined to give any economic forecasts but asserts things will improve in 2020.

Argentine assets abroad, an estimated $300 billion, remain a key ingredient to any economic recovery and the continued payment of the debt. The repatriation of even 10 percent of this amount would both stimulate the economy and provide funds to service the debt.
Fernández, however, has decided to use the stick instead of the carrot to access those holdings. He told the Telefe Network he intends to double the 2015 tax rate for assets held abroad to 2.5 percent. Mariano Sardans, an investment adviser in Buenos Aires, says this punitive rate would offset entirely the return on a bond investment or rental of an apartment abroad.
In addition, the new government has introduced a 30 percent tourism tax. Curiously, U.S. and European tourists are not the targets of this tax. Instead, it targets Argentines taking foreign vacations. Buyers of international airline tickets must pay an extra 30 percent, and Argentines who use their credit cards abroad will face the same surcharge. Even Netflix subscriptions are now taxed at the higher rate.

The new, higher wealth tax has had the predictable effect. Argentines with money are talking to consulting firms in Miami about how to get out entirely. Sardans says thousands are leaving the country, taking their capital, skills, and businesses with them.

Making an Enemy of the United States

The new government will need the help of the IMF to restructure its debt. To do that, it has appointed Martin Guzmán as economy minister. The 37-year-old economist is qualified for the immediate needs of the government: He specializes in helping countries deal with defaults due to high foreign debts.
Fernández will need the cooperation of the United States to get a new deal with the IMF, but from the get-go, his foreign policy has alienated the Trump administration. The new government offered asylum to former Bolivian President Evo Morales and immediately tilted to the socialist government of Venezuela by withdrawing the credentials of the representative of the opposition leader, Juan Guaidó.
Washington backed a $56 billion bailout for the Macri administration, and it would likely block any new Argentine deal with the IMF. The Trump administration has already shown its displeasure by prioritizing Brazil over Argentina for membership in the Organization for Economic Cooperation and Development, a reversal of earlier policy.

The atrocious track record of Argentine governments this century appears to be repeating like clockwork and continuing the long march toward isolation. The electorate has voted in politicos, backed by parasitic unions, eager to hammer nails into the coffin of Argentina’s economic competitiveness.

Fergus Hodgson is the founder and executive editor of Latin American intelligence publication Econ Americas. He is also the roving editor of Gold Newsletter and a research associate with the Frontier Centre for Public Policy.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Fergus Hodgson is the director of “ Econ Americas”, a financial consultancy, and publisher of the “ Impunity Observer” , a geopolitical intelligence service. He is the author of “ Financial Sovereignty for Canadians: Untether Yourself from the Ottawa Leviathan (2024).”
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