Does Another Debt Crisis Await Argentina?
WELLS FARGO SECURITIES, LLC April 06, 2010
3Let’s look at some statistics comparing today’s situation with that of the pre-default. Argentina’sforeign debt in 2001 was $144 billion, or 54 percent of GDP. Today’s debt is $147 billion, or48 percent of GDP. However, there is a caveat with these numbers, because they do not includethe money owed to the holdouts of the 2005 debt restructuring program. If we assume that theseholdouts get 30 cents on the dollar, today’s debt will increase to $156 billion and about 51 percentof GDP, which puts it close to what it was in 2001. However, at that time, the Argentine peso wasestimated to have been overvalued by approximately 40 percent and the economy had been inrecession for several years, with falling tax revenues. Thus, when the government allowed thepeso to depreciate, debt as a percentage of GDP surged to 152 percent in 2002. Today, the peso isnot overvalued by any standard, and while a relatively large devaluation is not out of the question,the situation is highly manageable and will probably not deteriorate as it did during the 2001-2002 crisis.
Argentina Tax Receipts
Year-over-Year Percent Change-10%0%10%20%30%40%50%199319951997199920012003200520072009-10%0%10%20%30%40%50%Tax Revenue: 2009 @ 13.2%
Argentine Consumer Price Index
Year-over-Year Percent Change0%2%4%6%8%10%12%14%20042005200620072008200920100%2%4%6%8%10%12%14%Consumer Price Index: Feb @ 9.1%
Source: IHS Global Insight and Wells Fargo Securities, LLC
Furthermore, today’s debt has a very different structure than that of 2001. Back then, 72 percentof the debt was denominated in U.S. dollars while 19 percent was denominated in euros and only 3 percent was denominated in the local currency. Thus, the devaluation that occurred in 2001produced a surge in the debt as a percentage of GDP and of interest payments as a percentage of GDP that pushed the country into default. Today’s debt profile is a bit better, with 41 percentdenominated in U.S. dollars, 24 percent denominated in euros and 28 percent denominated in Argentine pesos. Furthermore, 55 percent of the debt denominated in Argentine pesos is indexedto the CER (Coeficiente de Estabilización de Referencia), a measure based on the consumer priceindex. And because the government has been underestimating the consumer price index for morethan two years, the cost to the government of this debt has been kept low.Thus, the tampering with the inflation numbers is the second problem we see creating issues forthe government and for the country going forward. While it is very difficult to gauge what has been the “real” level of inflation over the last several years, it is worth noting that labor unions, which are normally pro-government, have been asking for increases in salaries that are close to 25to 30 percent, arguing that workers’ purchasing power has been severely affected by inflation.This is just a confirmation that the numbers amassed by the statistical institute are way off. Butthis is not the worst problem faced by the current administration. The mistrust this tampering hasproduced is such that nothing the administration does or publishes is credible. This is taking a bigtoll on the economy’s performance, as firms don’t want to invest if they are not going to be able torecover these investments by selling goods and services at the prices they need to sell them. Andmany firms are facing severe pressure from the administration to keep prices of goods andservices sold by those firms down.This has been all too common for this country since the middle of the last century, with thegovernment stepping into firms’ territory and disrupting their ability to price their goods. It has
The foreign debt-to-GDP ratio today issimilar to what it was before the last default.The government has been tamperingwith the inflationnumbers.