Argentina struggling to avoid fresh default

After almost four years of relative calm, Argentina is navigating rough financial waters again. The debt-laden South American country went into a brief, one-day "selective default" on Thursday imposed by ratings agency Standard & Poor's on some of the country's debts totaling $101 billion (€92 billion). But the ratings agency added in a press release on the same day that the default had been "cured" after Buenos Aires agreed to new terms for its short-term bonds, meaning the default rating could be lifted on Friday.

Finance Minister Hernan Lacunza described the agency's ruling as a "technicality" that was resolved with a new payments schedule that came into effect on Friday. But later on Friday, another ratings agency, Fitch, also downgraded Argentina to what it called "restrictive default," citing a missed payment. Fitch is now waiting for "confirmation of payment on the short-term local debt securities" and demanded more information on the revised terms announced by the government.

As a result of its fresh financial woes, the Macri government on Sunday imposed foreign-exchange controls on exporters, ordering them to seek permission from the central bank before purchasing foreign currency. In other new measures, transferring money abroad will now require government permission, and individuals seeking to buy dollars now face a monthly limit of 10,000 greenbacks.

Argentina has been in recession since 2018, and is battling rising unemployment and one of the world's highest inflation rates, running at more than 55%. In a bid to calm market turbulence, last week Argentina asked the International Monetary Fund (IMF) to restructure its debt payments on a $56-billion bailout loan agreed last year.

According to London-based consulting firm Capital Economics, net reserves currently cover only 60% of Argentina's financing needs of about $100 billion this year. Against the background of $30 billion in debt falling due in 2019 and another $50 billion next year, it comes as no surprise that the Macri government decided to hit the emergency brakes .

Finance Minister Hernan Lacunza said the government was planning to extend the maturity of its debt denominated in local and foreign currencies because of "short-term liquidity stresses." He insisted though the move was "not due to problems with the solvency of the debt."

Why is Argentina in dire straits again?

Argentina has a long history of sovereign defaults and acrimonious bickering with its international creditors. The latest crisis, is the result of a surprise election defeat by President Mauricio Macri earlier this month.

The pro-market and investor-friendly leader suffered a crushing setback in a primary election three weeks ago; a defeat that makes his re-election as president in October unlikely. He polled just 32% while Peronist presidential candidate Alberto Fernandez polled 47%. Fernandez blamed Macri's austerity measures for economic stagnation, high inflation and steady capital outflows.

Fernandez had previously vowed to renegotiate the massive IMF bailout package to end the "social catastrophe" this had imposed on the Argentinian people.

But it aren't Fernandez' remarks that are spooking investors and sparking turmoil in financial markets. It's the likely return to power of Cristina Fernandez de Kirchner as vice-president in a new left-leaning Peronist government. Argentina's president from 2007 to 2015, Kirchner had embarked on an interventionist economic policy that is said to have worsened the country's financial crisis. She repeatedly refused to pay back Argentina's debt, notably to US hedge funds, which she described as "vultures."

What Argentina wants from its creditors

The Macri government now wants to extend the maturity for short-term debt issued in pesos and dollars without reducing the capital or the interest.

Finance Minister Hernan Lacunza Argentina said he planned to delay $7 billion of payments on short-term local debt due this year and would seek a "voluntary reprofiling" of $50 billion of longer-term debt.  In addition, he also seeks to postpone repayment of $44 billion of loans already disbursed by the IMF. Argentina originally agreed to start repaying IMF debt in 2021.

The IMF has some understanding of the "important steps to address liquidity needs and safeguard reserves." The fund, which is currently in Buenos Aires with a delegation to assess the government's compliance with the bailout, said in a statement on Wednesday it would "continue to stand with Argentina during these challenging times."

'Voluntary restructuring' or default?

Macri's plan aims for a "voluntary extension of repayment times" and not a cut in interest payments or the size of the debt it owes to creditors. By some measures, however, this could already be judged to amount to a sovereign default.

Supported by international finance rules, credit ratings agencies usually declare a country in "default or selective default" when it fails to adhere to all of its debt obligations. It doesn't matter if this happens through late or incomplete payment or outright repudiation of the debt.

This can be avoided if a country offers to exchange its old, maturing bonds for longer-term ones, perhaps by making such a deal more lucrative with higher interest payments in return. But such a lengthening of repayment schedules must not be forced upon creditors to be considered voluntary.

Argentina's planned "voluntary reprofiling" is however very likely to create losses on the part of bondholders, which means the country runs a high risk of  seeing a ninth default in its history, and the third since the turn of the Millenium.