Argentina debt talks deadlocked as deadline looms

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Reuters

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The Argentine government says it cannot pay interest today

The Argentine government extended the deadline to restructure $ 65 billion in debt until May 22, in an effort to avoid further financial turmoil.

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Argentina had asked private bondholders to accept significantly lower interest payments and to postpone those payments until 2023.

Most bondholders rejected the offer.

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The government says it cannot afford to make payments in the midst of the coronavirus pandemic, but non-payment can make it almost impossible to obtain future loans.

Governments generally choose to finance spending by issuing bonds – this means that they are borrowed in cash by investors who expect to receive a certain amount of interest for several years before being reimbursed for the amount that was borrowed.

The interest rate that governments pay depends on how high investors think the risk is that they may fail to make a payment (known as a default).

What is the context in Argentina?

At the end of 2019, Argentina had accumulated $ 323 billion in debt, equivalent to 88% of its gross domestic product, according to data from the International Monetary Fund.

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On December 10, center-left politician Alberto Fernández took over as the new president of Argentina.

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In his inaugural speech, Fernández warned that, although Argentina is willing to pay its debt, it needs the economy to grow before it can make payments.

Much of the Argentine debt is quoted in US dollars and the recent slide in the value of the local currency, the peso, against the dollar, has made interest payments more expensive.

Currently, Argentine exports do not generate enough foreign currency to pay the massive debt.

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Argentine exports do not raise enough foreign currency to pay debts

That is why the president tried to restructure part of the debt to delay payments and buy time for the government.

His government approached international creditors with $ 65 billion worth of bonds with an offer that included a three-year grace period in which Argentina would not have to pay interest, as well as a substantial cut in Argentina's interest payments.

While some creditors agreed that Argentina should have more time to pay, many refused to cut the interest rate and no deal was reached until Friday, the deadline Argentina had set.

Some creditors also disliked the Argentine government's "take it or leave it" approach.

Argentina has now extended that deadline until May 22, the day it is expected to pay $ 500 million in interest.

President Fernández said he hoped that creditors would now make a counter offer and that the two sides could still reach an agreement by that date.

Will bond holders be easy for Argentina?

Even before the coronavirus attack, the Argentine economy was in crisis. But the Fernández government closed the country quickly, with some of the region's most difficult blocking measures.

And while that helped keep Covid-19's death toll relatively low, it devastated a country desperate for a break. The pattern would be even more devastating.

What happens next, however, is uncertain. Last week, a group of renowned economists, including Nobel Prize winner Joseph Stiglitz, urged bondholders to act in good faith, arguing that debt relief is the only way to "fight the pandemic and put the economy on a path. sustainable ".

But, after expanded debt negotiations, will bondholders follow their arms and accept only one deal under their terms? Or could they calmly go to Argentina under the circumstances? After all, the whole world is in economic collapse. Argentina may be one of the first countries to change to the standard, but it will not be the last.

Why does it matter?

If the two sides do not reach an agreement by May 22 and Argentina does not make the $ 500 million interest payment due that day, the country will be in default.

Defaulting can have serious consequences. Argentina existed before, mainly in 2001, when it was unable to pay its debts in the midst of a broader economic and political crisis, in which the country went through five leaders in a matter of weeks.

People's savings accounts were frozen to prevent a run on the margins and violent street protests led to dozens of deaths.

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External debt and its payment is a controversial issue in Argentina

The effect on Argentines was devastating, with many seeing their hard-won prosperity quickly disappear.

This default also led Argentina to be seen as an unreliable debtor. He became involved in a decade of legal battles over how to restructure and pay those debts.

There have been more defaults since then, in some counts, a total of eight, although the government disputes that number.

A new default on May 22 would undoubtedly cause more financial turmoil amid the turmoil already caused by the coronavirus pandemic.

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