Argentina said it didn’t make US$ 500 million in debt payments due Wednesday, starting a 30-day countdown to a possible default unless the government and bondholders can reach a deal on restructuring its massive foreign debt.
The failure to pay came a week after the government of President Alberto Fernández presented a proposal to restructure roughly US$ 70 billion in debt involving the suspension of its debt obligations for three years and a 62% reduction for interest payments.
Argentina will use the period to seek creditor acceptance of its proposal, which it has said will remain in force until May 8 and aims at “restoring the sustainability of public debt in foreign currency.”
If creditors do not accept the offer — and at least three groups of bondholders have said they will not — Argentina will officially be in default by the end of May, the second default in two decades.
Argentina is under a mandatory quarantine due to COVID-19 and was in a recession with high inflation and 35.5% of its population in poverty even before the pandemic.
Wednesday’s statement from Argentina’s government highlighted “its willingness to pay even in the most serious international context” and said it is looking for a debt profile “compatible with a path of sustainable growth in the medium and long term, which improves future repayment capacity future and basic social indicators.”
Meantime the country's money supply is surging as it deals with the economic fallout of the coronavirus pandemic, stoking inflation fears. Since Argentina is cut off from credit markets as it nears default, it can’t borrow to fund stimulus programs, as other countries in the region are doing.
Instead, the central bank is emitting massive amounts of money to cover government programs, threatening to drive up an inflation rate that is already among the highest in the world.
“The risk of inflation is right around the corner,” said Marina Dal Poggetto, executive director at consulting firm Eco Go in Buenos Aires, in a phone interview. “Argentina is facing fiscal needs and the only tool in the short term I’d say is monetary emission.”
Since the lockdown was announced March 19, the monetary base has increased about 20%, with the central bank sending 340 billion pesos (US$ 5.2 billion) to the government during that time as dividends and temporary transfers.
That’s causing the peso to lose value as companies and wealthy citizens try to convert excess pesos into the safe haven of U.S. dollars. Up until the quarantine, the so-called monetary base had only grown 7% this year.
While the U.S. Federal Reserve and other central banks are also emitting large amounts of money to support their economies during the pandemic, in Argentina the risks are greater since annual inflation is already 48%. In the past the country has suffered hyperinflation, and in 2013 was sanctioned by the International Monetary Fund for faking its inflation numbers.
The government of President Alberto Fernandez was among the earliest in the region to impose strict lockdown measures to curb the coronavirus outbreak. Argentina has so far been relatively unscathed by the virus, but the economic damage has been severe.
The economy will shrink 5.7% this year, according to the IMF, among the deepest slumps in Latin America, and this comes on top of contractions in 2018 and 2019.
The official currency market is tightly controlled, but the peso has plunged in recent days in parallel markets, sending the gap with the official rate to its widest in five years.
“In Argentina, devaluation, even at the parallel currency level, is a one-way ticket to an acceleration in inflation,” said Bagues.
Central bank chief Miguel Pesce said in a TV interview last week that growth in the monetary base comes from a measure designed to boost lending to businesses.
In a statement, the central bank said it doesn’t foresee a major short-term risk to inflation and that it can mop up excess pesos once the pandemic subsides. The bank said it is monitoring Argentina’s different exchange rates because a stable peso is critical to normalizing the economy, and that it is ready to provide additional support to the government if the lockdown is prolonged beyond April 26th, as apparently it will be announced on Thursday/Friday for the most densely populated areas of the country, Buenos Aires City and Buenos Aires province.