Report Nº: 85904/05/2020
The government presented its debt swap proposal. The most important issue at stake is not whether the creditors will accept it but whether Argentina will not fall into insolvency in the future again. The public finances management, before and after the confinement, shows that unsustainable fiscal imbalances keep on.
The Argentine government formally presented the proposal for a dollar debt swap that the previous government left in default. Basically, it proposes a reduction in capital between 5% and 12%, depending on the extension of the new bond, and that there will be no capital or interest payments until the end of 2022. Between 2023 and 2025 a very low interest rate will be paid (in the order of 0.5% annually) and only from 2026 capital and higher interest rates will be paid again. In this way, the current government will not face the burden of capital and debt interest payments for most of its executive term.
Controversy arouses. Creditors claim that the proposal is miserly and arbitrary. The government argues that the country cannot pay debt until it recovers economic growth. The dispute leads to an overemphasis on the possible consequences of the outcome. But it distracts the attention from the central question, which is, why Argentina is repeatedly falling into insolvency and whether it is feasible that this anomaly will ever change.
Beyond the fact that it is a structural problem, a very illustrative testimony of the high fiscal propensity to spend in excess of resources is shown by the dynamics of the public finances in the first quarter of 2020. It should be clarified that Covid-19 confinement did not affect most of this period. According to the Ministry of the Economy, it can be seen that:
These data show that public revenues grew well below inflation, which was 50% in the period. However, public expenditure grew well above prices. This growth is explained by the unbridled hike up of current expenditure, while public investment dropped in real terms by less than half compared to 2019. The result was that 2020 started with a primary fiscal deficit equivalent to 2.3% of GDP.
In this delicate fiscal context, the coronavirus appeared. Following the recommendations of a closed circle of medical experts, the government adopted the most extreme measure which is absolute confinement. One of the consequences is that since March, 19 a large part of the economy is paralysed. The April fiscal result is not yet available, but according to a report by the Budget Office of the Congress, the government actions to alleviate the containment rose fiscal spending by another 2.3% of GDP. This implies that the fiscal deficit must already be above 5% of GDP since the impact of the drop in revenues is still unknown.
The situation in Argentina is substantially different to the developed countries (USA and most of the EU). They alleviate the consequences of the economic paralysis with more public debt and monetary emission. But Argentina is not in condition to appeal to these tools. It cannot get into debt (even assuming that the debt swap is successful) and has very limited space to money printing. If the confinement continues, the fiscal deficit could exceed 10% of the GDP. The massive monetary expansion needed to finance such a deficit will double the monetary base (currently at 8% of GDP) and the amount of money that people hold in cash, current and in savings accounts (12% of GDP). Such an expansion of money supply entails a high risk of hyperinflation.
The coronavirus crisis demonstrates the low level of professionalism in public management. On the one hand, a authorities chose a draconian health strategy without considering the economic, social and health damages it generates. On the other hand, the measures to make the sacrifice of confinement explicit and equitably distributed were not adopted. The strongest evidence in this regard is the resistance to reducing the salaries of public employees. In this context, the outcome of the public debt swap is a minor issue in the face of the enormous social costs generated by the poorly managed public sector.