Argentina: The Crisis That Isn't

Issue Brief

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October 2008

Center for Economic andPolicy Research

1611 Connecticut Ave, NW Suite 400 Washington, DC 20009tel: 202-293-5380fax:: 202-588-1356 www.cepr.net

Argentina: The Crisis That Isn’t

B

Y

M

ARK

W

EISBROT

*

In recent weeks there have been numerous press reports and articlesindicating that Argentina is facing serious economic problems that couldlead to a default on its sovereign debt. Some of these analyses compare Argentina’s current situation to that of 2001, when the government of Argentina did actually default.

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It is not only journalists and financial analysts that have expressed such views. From July 22 to August 7, before the recent financial market turmoilsent emerging market bond country risk premiums sharply higher, Argentina’s five-year credit default swap rate rose by 186 basis points. Thismeans that the cost of insuring $10 million of Argentine bonds rose from$639,000 to $825,000. This report will look briefly at Argentina’s current debt, fiscal, and overalleconomic situation to see if such analyses are justified. It appears that thereis little or no basis for the fear that Argentina might default on its sovereigndebt at any time in the foreseeable future, or indeed even the more distantfuture.

*Mark Weisbrot is Co-Director at the Center for Economic and Policy Research in Washington, DC. The author would like to thank Luis Sandoval and Rebecca Ray for research assistance, and also Roberto Frenkel and DanBeeton for helpful comments.

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See, for example, Benson, Drew “Kirchners Losing Argentina in Slump Leading to Crisis”,

Bloomberg

,

September 2, 2008. Accessed online on October 2, 2008:<http://www.bloomberg.com/apps/news?pid=20601086&sid=apxZ_6pnrl5U&refer=latin_america> and Abram, Aldo andMartin Krause (2008), “Deuda e inflación: Volver al futuro”, CIIMA-ESEADE:<http://www.eseade.edu.ar/ciima/articulos/deuda.pdf>.

Center for Economic and Policy Research, October 2008

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Argentina’s Debt Burden

FIGURE 1Argentina: Total Public Debt (% of GDP)

0.0020.0040.0060.0080.00100.00120.00140.00160.00

1 9 9 7 - Q 4 1 9 9 8 - Q 2 1 9 9 8 - Q 4 1 9 9 9 - Q 2 1 9 9 9 - Q 4 2 0 0 0 - Q 2 2 0 0 0 - Q 4 2 0 0 1 - Q 2 2 0 0 1 - Q 4 2 0 0 2 - Q 2 2 0 0 2 - Q 4 2 0 0 3 - Q 2 2 0 0 3 - Q 4 2 0 0 4 - Q 2 2 0 0 4 - Q 4 2 0 0 5 - Q 2 2 0 0 5 - Q 4 2 0 0 6 - Q 2 2 0 0 6 - Q 4 2 0 0 7 - Q 2 2 0 0 7 - Q 4 2 0 0 8 - Q 2

% o f G D P

Source:

Argentina’s Ministry of Economy and Production (MECON).

Figure 1 shows Argentina’s total public debt as a percentage of GDP. As can be seen in the graph, itpeaked at 143.5 percent of GDP during the economic crisis of 2002, in the fourth quarter, and, despitesome ups and downs prior to 2005, has declined to 51.5 percent today. The steepest drop was in thesecond quarter of 2005, when the debt fell from 121.7 percent to 66.2 percent of GDP as a result of thedebt restructuring. Nonetheless it has fallen steadily since then, to its current level of 51.5 percent of GDP.

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Clearly the government is not facing a rising or unusually high debt relative to GDP; rather it is falling. What about the burden of debt service in coming years? This is shown in Table 1. As can be seen, theinterest payments on the debt are relatively modest, about 1.5 percent of GDP for 2008, and 1.4 percentof GDP for 2009, and then declining thereafter.

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Some reports have compared the present level of debt to that in 2001, just before the default, when it was 57.3 percent of GDP. However, this is not an appropriate comparison, because the exchange rate was so overvalued in 2001; as soon as thecurrency collapsed, the same debt in 2002 was 143.5 percent of GDP (see Table 3).

Argentina: The Crisis That Isn’t

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TABLE 1Argentina: Public Debt Service (2008-2018), in % of GDP

Payments

July-December20082009201020112012201320142015201620172018

(millions of US$)

Total PublicDebt 12,304.7 18,232.912,590.614,170.910,707.49,055.77,441.110,971.215,779.88,456.83,806.5

Principal 10,277.9 14,070.58,776.110,693.87,598.26,188.03,903.07,532.112,881.05,914.11,430.5Interest 2,026.8 4,162.53,814.53,477.03,109.22,867.73,538.13,439.12,898.92,542.72,376.0

(in % of GDP)

Total PublicDebt 4.43 6.314.194.543.302.682.123.004.152.140.93

Principal 3.70 4.872.923.422.341.831.112.063.391.500.35Interest 0.73 1.441.271.110.960.851.010.940.760.640.58

Source:

MECON and author’s calculations.

Principal payments are larger: 3.7 percent of GDP for the second half of this year, also peaking in 2009 at4.9 percent of GDP, then declining. Normally, when there is a lump in principal payments, as in this case,it can be smoothed out by rolling some of it over. However, Argentina defaulted on its sovereign debt in2001, and foreign creditors holding some 24 percent (19.3 billion) of the restructured debt did not agreeto the debt restructuring that took place in 2005. As a result, there are pending legal actions from theholdout creditors that prevent the government from accessing most international credit markets.However, there is no reason to believe that the Argentine government will have trouble making all of itsdebt payments in these next two years, including principal payments.

TABLE 2Argentina: 2007-2010 Program and Financing Needs

In US$bn

20072008F2009F2010FUses of Funds 13.216.120.220.2

Amortizations 7.68.511.310.2Buybacks 0.91.42.02.6 Interests 4.86.16.97.5

Sources of Funds 6.510.08.39.7

Primary Surplus 4.97.37.78.1Others 1.51.5-0.10.6 Multilateral Organizations Loans 0.50.60.50.5Net Recovery from Provinces -0.30.60.30.5

Financing Requirements 6.76.111.810.5

Bonds Issuances 5.05.1 Auctions 3.33.6 Private Placements 1.71.5 Intra-Public Sector Financing(Bills and Government Securities)1.71.0

Source:

Reproduced from MECON, "2008 Strategy and Financing Program", p. 18:[http://www.mecon.gov.ar/finanzas/sfinan/english/download/08_Strat_&_fin_%20prog.pdf].

Table 2 shows the Argentine government’s financing strategy as of April 2008. As can be seen, total debtservice, including $2 billion of debt buybacks, for 2009 will increase to $20.2 billion from $16.1 billion for