Argentina is an emerging nation currently considered to be one of Latin America’s three largest economies. With an area of 2.5 million square kilometers dominated by agriculture, Argentina has a population of 43 million, 80 percent of which are of Western European descent and the rest coming from Spain and Italy. Argentina’s GDP per capita is approximately 14,000 USD. If Argentina had paid back its foreign loans on time and sustainably implemented the economic reform they started in the 90s, they would have had developed much faster than they are today.
In 2001, the Argentine government announced a default on its sovereign debt of 100 billion USD acquired in bonds. Their economy declined for the fourth year by 2003 and was reduced by 20 percent. Unemployment reached 25 percent while the peso, Argentina’s national currency, fell 400 percent in its exchange rate against USD.
Armies of unemployed people appeared in every city and were trying to make their living by collecting and selling salvaged materials, such as cardboard boxes and scrap metal. The media named them “cartoneras”. For a while, the cartoneras replaced Carlos Gardel, Evita, and Maradona as Argentina’s symbolic citizens.
In the 90s – almost 10 years before the 2001 default happened – Argentina, which was crippled with hyperinflation, fixed the peso to the U.S dollar, freed its foreign trade, reduced government involvement in the economy, and started privatizing state-owned enterprises. As a result, the economy grew 30 percent in four years as the inflation rate decreased to a single-digit number. However, then President Carlos Menem did not continue this change, and focused more on internal political conflicts. He was eventually detained in his residence after connections were made to him being involved in a secret arms trade. It is said that he was exonerated later on because he increased the number of judges on the Supreme Court from five to nine and got his own people in.
Néstor Kirchner, who became the President of Argentina in 2003, pursued an economic expansionary policy. Due to an increase in prices for Argentina’s main export products, such as corn and beef, the economy grew again. It created five million jobs and brought a great amount of capital into internal expenditure and real estate. Some privatized companies, such as the pension fund, national post, airlines, and railway enterprises, were transferred back to state ownership.
Countries that can no longer pay back foreign loans see their credit ratings fall to the lowest rates while their unpaid bonds become junk bonds. Therefore, such countries (and their private sector) become unable to raise capital by borrowing from abroad. Without access to the international capital market, any country will lose the normal conditions for economic growth and have much more limited opportunities to attract foreign investment and bring new technology in.
Argentina found no success despite taking many measures to settle its foreign debts after announcing their default. With the objective of bond restructuring, the Government of Argentina proposed buying their bonds back at 30 percent of their value in 2005 and in 2010. The proposal was accepted by 97 percent of bond owners. The value of Argentina’s bonds kept falling after every trade since the default, so the bond owners found it acceptable to exchange the bonds at 30 percent of their value. However, seven percent of all bonds were already held by vulture funds.
Hedge funds, that also go by the name of “vulture funds”, purchase distressed securities like defaulted bonds at cheaper prices, and generate large profits by forcing the bond issuers to pay the full, original price. Former President Cristina Kirchner described these hedge funds as “vultures” when the hedge funds were forcing her to buy the bonds at a price 10 times higher than what they had paid. The vulture funds then attempted to seize Argentina’s state-owned properties , such as their ships and aircrafts. Hedge funds such as NML Capital and Aurelius Capital Management then filed a lawsuit against Argentina with the U.S. District Court for the Southern District of New York.
Argentina’s current president, Mauricio Macri, who was elected in 2015, started negotiating with the two hedge funds to settle the debt row that lasted 15 years and cost 14 billion USD. The final agreement was made this month that Argentina would pay 4.65 billion USD to settle everything for good. In April, Argentina’s parliament will discuss and make a final decision on the settlement.
It is expected by everyone involved that Argentina’s debt misfortune will end sooner rather than later and that their economy will get back to normal. Moody’s has downgraded Argentina’s credit rating to Caa1, which is the worst rating.If Argentina manages to get out of this, they will be able to issue bonds in the international market again.
2016.03.30