Argentina’s current debt holds an average interest rate of 7%, which is seven percentage points higher than the zero interest that Germany paid on its government bonds for 30 years, and nearly six points for the 1.2% interest paid by the US Treasury, and Argentina noted that an interest rate of 7% It will necessarily result in default.
When one car slides down an icy road, fifty cars can crash, and this is what happens with the international financial markets, as Mexico’s failure to pay debts in 1982 led to the accumulation of debt of dozens of countries, and the devaluation of Thailand caused July 1997, the Asian financial crisis, and the bankruptcy of Lehman Brothers in September 2008, triggered a Great Recession worldwide.
The IFIs must be smarter than starting with the collapse of 2020 due to Covid 19, and their wisdom will be tested soon.
Argentina was experiencing a debt crisis again, even before Covid-19 plunged the world economy into its worst economic recession since the Great Depression, and as has often happened in the history of defaults in Argentina, has proven an ill-conceived agreement with rebel creditors. In 2016, which was followed by a rapid return to bond markets, it was a dream of the then president of Argentina, and the country’s creditors.
The fiscal deficit undermined stability, as the 2018 bailout failed to succeed with the International Monetary Fund, and Argentine debt, which has very high interest rates, proved unsustainable.
Yet Argentina was not the only borrower, with lenient lending standards thanks to financial markets, and as a result of ample liquidity pumped by the Federal Reserve and other central banks, many developing countries to borrow heavily in recent years, and it was increasingly recognized that distress Sovereign debt is a major comprehensive risk, and a session at the 2019 IMF Spring Meetings was entitled “Addressing the Next Wave of Sovereign Debt Crises”.
In the context of Covid-19, the collapse of oil prices in March, the start of the near-global closure, the decline in government revenues, and the huge public spending for the survival of the population, led to an unprecedented global financial crisis in peacetime, and the US budget deficit will increase About 18 percent of GDP, or higher, and for many emerging economies, the financial picture cannot be darker.
But even in this context, Argentina made a realistic and appropriate offer to restructure its debt to its creditors, and its creditors must respond positively to it. Here are the details of the offer:
Argentina’s current debt holds an average interest rate of 7 percent, which is nearly seven percentage points higher than the zero interest that Germany paid on its government bonds for 30 years, and nearly six points from the 1.2 percent interest paid by the US Treasury, and Argentina noted Indeed, a 7 percent interest rate would necessarily result in default. The International Monetary Fund has agreed that it is unsustainably high, with hardly any governments – including the United States – able to bear a 7 percent interest rate in this economic environment.
Argentine creditors say they need an interest rate of 7 percent, or even higher, because of the possibility of defaults, but they seem to be unaware that if Argentina’s interest rate is lowered to approach the US interest rate, defaults will not necessarily happen And the high interest rate of 7 percent is a self-fulfilling prophecy: it makes defaults inevitable, while that will not necessarily happen if the interest rate is low.
Argentina proposed to refinance existing debt with low safe interest rates, thus avoiding the need for a “reduction” in the capital. (In fact, in line with Argentine law, the offer of exchange includes a small symbolic reduction of the face value of debt, which, in my view, should be canceled in any final deal) Similar to the mortgage refinancing process, existing bonds will be replaced by bonds that reflect low interest rates Today, however, instead of an interest rate equal to the price of US treasury bonds, Argentina offers an interest rate of 2.3 percent, higher than the yields of the treasury bonds in its creditors ’portfolios, and there are details of the grace periods, and the time paths of interest performance operations that must be negotiated and refined, And put the finishing touches on it, in light of the horrific and evolving economic facts.
But the creditors ’phases are strange. They claim that Argentina imposes a significant reduction in the value of the debt, although it is not essentially available. The Argentine government proposes a safe return that is higher than the safe interest rate of the United States, and its offer is logically correct. Causes the risk of default? Why do creditors prefer Argentina’s default on its economic recovery?
Creditors calculate the alleged debt undervaluation in Argentina’s offer using a 10-12 percent discount rate, as if they deserve a risk-free return of 10 percent or higher, when the US Treasury rate is just above 1 percent, and the press is keeping pace In these financial circumstances, it indicates, motivated by a sense of duty, that Argentina imposes a significant reduction on creditors, while it does not do so. In fact, Argentina is reducing the interest rate at risk of default to an interest rate that will not cause this.
And I will add another point, some friendly official creditors, or multilateral institutions, can improve the deal by guaranteeing some or all of Argentina’s payments on new bonds, and such a guarantee will be a completely safe bet: with a low interest rate, and a new maturity structure, Argentina will not default Payment.
And often the global financial markets are in a state of panic when one country, not to mention many countries, begins to slip, as it is possible that there are 30 to 40 countries suffering severe financial stress now, and all these countries need to refinance their debts this year and next year, Until the recovery from the epidemic restores global economic activity, restores government revenues, and reduces the need for emergency expenditures.
In such cases, collective rationality in financial markets requires guidance from the International Monetary Fund, and the leadership of a number of major creditors. Otherwise, this will lead to a creditors’ race to extract assets. Each creditor says to the other: “You refinance the debt while I receive the payment, thanks is yours”.
If debt service payments for this year are dealt with cautiously, they can be recapitalized, at low interest rates, but in order to avoid financial accumulation, and if not, 2020 will represent a new and destructive episode of the global financial crisis.
When banks panicked in 1907, it was J. Perponte Morgan and his bank who led the financial system away from the brink, and in 2020 the leader must be BlackRock, which was managing $ 6.5 trillion in assets at the end of The first quarter of the fiscal year, which is one of Argentina’s major creditors, and Black Rock could direct the bondholders to refinance Argentina’s debt at a safe interest rate, and do the same with other sovereign borrowers, who are suffering from the epidemic.
It’s your turn, Larry Fink, to help prevent a global financial disaster.
* Jeffrey D. Sachs
* Professor of sustainable development, professor of health policy and management at Columbia University, director of the Colombia Center for Sustainable Development and director of the United Nations Sustainable Development Network.