After Deal with Holdouts, Argentina Must Cut Deficits, Bring Investment

EspañolBy Luis Enrique Ponce Goyochea

Argentina and its main international creditors have finally settled a long-held dispute over the repayment of defaulted sovereign bonds by closing a deal worth USD $4.65 billion.

At first glance, Argentina’s agreement with the holdouts to put an end to almost fifteen years of default seems a major victory; the country can now issue debt at lower interest rates in international financial markets.

This, however, is merely what is apparent: Argentina can indeed look forward to finally returning to the league of emerging markets, leaving behind its dark years as a peripheral market in the global economy.

Such an upgrade should allow Argentina to issue sovereign bonds at lower interest rates given the lower risk of default attached to its sovereign debt. Argentinean companies looking to issue corporate debt will also benefit, since they will access international financial markets at a lower price.

Nevertheless, we still have to take into account “what is not seen”, as French economist Frédéric Bastiat would remind us.

In this case, Argentina’s ability to access lower interest rates is not an end in itself. In essence, it is a means for the country to eventually return to the map in terms of strategic international relations. It is likely, for instance, that President Mauricio Macri’s government can now actively reestablish bilateral and multilateral trade agreements with the United States and the European Union.

In this sense, the ultimate and most relevant goal — a goal which often remains “unseen” — is economic freedom through greater openness in trade. Commerce with other nations, after all, has historically led to progress.

Isolation from global markets, on the other hand, leads to the decline of any institutional order and to a deteriorated business environment. The higher the risk attached to the country, the lower the flows of investment.

This is precisely what caused Argentina to fall into the group of so-called frontier markets in the first place, sharing a place alongside countries with such poor credit records that they inevitably needed to pay very high interest rates to access financial markets.

Simply put, common sense dictates that nobody would seriously make loans to any individual, company or country that is quite unlikely to properly honor debts.

Argentina, for instance, has defaulted four times over the past three decades: in 1982, after the policies of de facto finance ministers Martínez de Hoz and Lorenzo Sigaut; in 1989, after the Austral Plan launched by former president Raúl Alfonsín (1983-1989), who paved the way for hyperinflation and the advent of the convertible peso by virtue of the 1991 peso Convertibility Plan; in 2001, after the fiscal crisis leading to the first official devaluation of the formerly convertible peso; and Cristina’s Kirchner declaration of war on the “vulture funds” in 2014.

Such an unstable credit record clearly shows a roller-coaster pattern for Argentina, as the country is going into default once a decade on average.

In terms of private equity: who would seriously invest in a company which is most likely to go bankrupt every ten years? Not only would it have practically no access to financial markets, it would no longer even be in business.

Furthermore, it is certainly unsustainable for any kind of individual, company or country to systematically attempt to live beyond their means. Obviously, Argentina is no exception to this iron rule of business and finance.

So although Argentina’s newfound access to financial markets constitutes a major step forward when it comes to putting the country back on the global economic map, we will not overcome stagflation — that is,the current simultaneously high levels of inflation and unemployment, along with declining levels of productivity — by increasing levels of debt and public spending .

The government should rather concentrate on reducing public spending and, especially, on not allowing public sector squandering to push away private investment. Clearly, there is no such thing as as the “multiplier effect” of public spending, a notion dear to Keynesian mythologists.

On the contrary,  the evidence shows that increasing levels of public spending is neither sustainable nor cost-effective, since this eventually leads to unsustainably high levels of budget deficits. And deficits end up destroying any country´s currency since they lead to hyperinflation because they are usually financed through money inflation. It is by systematically printing out domestic currency bills that supposedly independent central banks make up for large fiscal imbalances.

In Argentina’s case, the record is rather sad. Governments destroyed four national currencies in less than three decades, between 1969 and 1992. These are the peso moneda nacional (1969), the peso ley 18.188 (1983), the peso argentino (1985) and the austral (1991). The current peso is the fifth currency in Argentina´s monetary history.

The bottom line is that any agreement reached an that takes a country back to international credit markets is positive. But we should concentrate on the even more relevant goal of reducing and eliminating any budget deficit, since this is the true threat to a country´s sound currency and, hence, to its economy.

We should also try to bring in investment and increase international trade, which would lead to a boost in Argentina’s long-term productivity levels and in its general prosperity.

Luis Enrique Ponce Goyochea is a Masters of Science in Management from the Swiss Business School.

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