Debt and disease amid the pandemic

Buenos Aires – The COVID-19 pandemic will undoubtedly be remembered as one of the most difficult episodes in the history of modern capitalism. But it is difficult for different countries in different ways, which is reflected in the policies their governments have adopted. And nowhere are the difficulties greater than in highly indebted countries.

In Argentina, the pandemic hit at a time when the country had no access to credit. In that context, we initiated and finalized a sovereign-debt restructuring that has — for the first time — tested the collective-action clauses (CACs) that became the new market standard in 2014.

Back in 2016, Argentina had finally recovered access to international credit markets after a long legal battle with the “vulture funds” — bondholders who swoop in to buy distressed debt, hold out in the ensuing restructuring process, and then litigate to get better treatment than the restructured bondholders did. By highlighting the failures of the international architecture for resolving sovereign-debt crises, Argentina’s travails set the stage for reform. In late 2014, the United Nations General Assembly launched a process to create a formal framework for sovereign-debt restructuring; following an endorsement from the International Capital Markets Association in 2014, CACs would henceforth bind minorities to the decisions of qualified majorities.

Argentina borrowed some $42 billion under this new dispensation. But in 2018, market expectations about its prospects changed, triggering a deep, prolonged currency crisis that eventually rendered the country’s foreign-currency-denominated public debt unsustainable. Argentina turned to the International Monetary Fund, which provided an unprecedented $57 billion loan, presumably in the belief that the country was facing only a temporary liquidity crisis.

To others, however, it was clear that Argentina was confronting a more fundamental problem of macroeconomic inconsistency and debt unsustainability. Hence, when the current government — in which I serve as economy minister — took office in December 2019, we immediately initiated a sovereign-debt restructuring to restore debt to a sustainable level, and thus to enable an eventual economic recovery. To that end, the National Congress authorized the government to use the central bank’s foreign reserves to continue servicing debt payments up to a limit, thereby avoiding a disorderly default while we conducted the restructuring.

One of the first steps in this process was to work with the IMF to define the terms of debt sustainability — that is, how much debt the country could reasonably afford to service without incurring unacceptable costs, such as a marked increase in poverty or unemployment. In the event, we and the fund’s mission to the country each produced analyses that were remarkably similar in their assessment of the relief that would be needed to restore debt sustainability.

We then launched formal negotiations with the country’s bondholders on the basis of these pre-pandemic assessments. But, within days, COVID-19 struck Argentina, forcing a massive and rapid mobilization, as well as far-reaching logistical adaptations. The negotiation process was conducted almost entirely via Zoom. And after a few months of intense talks, Argentina and its creditors reached a deal.

The negotiated agreements will save Argentina more than $37 billion in debt payments over the next decade, by lowering the average coupon rate (in U.S. dollars) from about 7% to almost 3%. Moreover, due to the activation of collective action clauses, the share of restructured debt was expanded from a high acceptance rate of 93.5% to 99% — and to 100% for the stock of bonds that had been issued under the post-2014 CACs.

This process has yielded several lessons for future sovereign-debt restructurings. First, the IMF’s role — whether it is positive or negative — absolutely matters. There is widespread recognition among analysts that the fund has often delayed and undercut restructurings over the past four decades; this time, its contributions helped to restore debt sustainability.

Second, enhanced CACs certainly help, but they are not sufficient. Differences of views between creditors and debtors can still lead to protracted resolution processes, and thus to dangerous economic and social consequences. To complement the new CACs, we must improve the international architecture for sovereign-debt restructuring (a task that the G20 has taken on in the context of the pandemic).

Third, not even improved frameworks can overcome unresolved problems in a country’s political economy. Private creditors remain powerful, and can marshal intense lobbying pressure to secure their own interests. Their efforts can be especially effective at undermining the efforts and legitimacy not only of government authorities but even of IMF officials.

That said, Argentina’s 2020 restructuring benefited widespread support from highly influential global players. In addition to the IMF, 150 internationally renowned academics (including several Nobel laureates), members of the G20 and Pope Francis all endorsed the process. There was widespread domestic support, too, with the National Congress quickly passing two laws that were critical for conducting an orderly restructuring.

As matters stand, the pandemic will likely leave several other countries with distressed debt that will have to be resolved to secure an economic recovery. But many of these countries will lack the Argentine government’s capacity to ensure a level playing field for negotiations.

In the usual context of asymmetric power, these governments will face creditors’ unreasonable demands. They will have to stand firm to defend the interests of the people they represent. To give them a fighting chance, we must institute an international framework to mitigate the imbalances of economic power that so often leave indebted countries worse off.

Martin Guzman is Argentina’s minister of economy. © Project Syndicate, 2020.