Economy

Argentina’s long history of debt defaults

21st May 2020

By Miguel Angel Boggiano

Argentina’s long history of debt defaults

Argentina has gone into default many times in its history, and the compulsory re-profilings of short-term notes by Hernán Lacunza in 2019 and Martín Guzmán in 2020 were clearly another instance of this.

With negotiations ongoing on whether this default will extend to international bonds, we’ve looked at the historical record of Argentina’s default-like events and found there are nine of them, although in our interpretation only five should be really counted as such. An additional four events of big significance are counted as defaults, although we see that categorization as a stretch. Let’s go over the record:

</p> <h2><strong>Argentina’s five defaults</strong></h2> <p>The <strong>first episode</strong> dates back to 1827. Argentina had an active presence in international capital markets after its 1816 independence. It was amid a credit boom caused by the end of the Napoleonic wars that Argentina and other Latin American countries managed to issue bonds in London to finance its independence wars.</p> <p>This credit boom ended in 1825 when the Bank of England raised its discount rate to end a run against its reserves. This monetary tightening derived in a <a href="https://en.wikipedia.org/wiki/Panic_of_1825">stock market crash</a>, banking problems, and recession across England and Continental Europe. In a few months, that crisis expanded to Latin America. Argentina went into default in 1827 and only re-started payments by 1857.</p> <p>The <strong>second default</strong> came with the Panic of 1890. The main cause was the <a href="https://en.wikipedia.org/wiki/Baring_crisis">near-bankruptcy of the Barings Bank</a> due to an excess of credit given to Argentina. That credit, which the country took during Julio Roca’s presidency, was used to build trains and modernize Buenos Aires City looking to transform it in the “Paris of South America”, with broad avenues, parks and a modern port, given Argentina’s massive growth during its <a href="https://gettheessential.com/politics/2019/12/26/century-long-farming-conflict-resurge-in-argentina-city-countryside-agro-industry-farmers-exports-protectionism">agro-exporting model years</a>.</p> <p>Argentina became at that time the fifth most indebted country in the world, as 11 percent of all London-based bond issuances between 1884 and 1890 were to raise debt for the country. The same was true for between 40 to 50 percent of issuances outside of the UK. The United States, at that same time, had 20 times Argentina’s population and a fraction of its debt. What took place in the 1880s was a historically unprecedented capital inflow to an emerging market like Argentina. That irrational exuberance becomes evident in retrospective when looking at Argentina’s current account deficit of the time: around 20 percent of GDP. Argentina defaulted ₤48 millions, around 60 percent of all the debt defaulted in the world in 1890.</p> <h2><strong>Fresher cases</strong></h2> <p>The <strong>third episode</strong> came in 1982. This debt crisis was, after that of 1930, the largest one of the 20<sup>th</sup> century. Dozens of Latin American and African countries defaulted, although with one twist: instead of defaults on bonds, it was defaults on banking loans.</p> <p>The 1976-1983 dictatorship abused the liquidity boom caused by petrodollars. For the first time since 1930, there was international credit for emerging markets, and Argentina moved from a total foreign debt of USD 7 billion in 1976 to one of USD 45 billion in 1983, while GDP barely moved in the same period.</p> <p>The spark was the strong rise in US interest rates that ended up pushing Mexico into crisis. On August 16 1982, Mexico said it could not pay interest maturities on its USD 80 billion debt. By October 1983, 27 countries owing USD 239 billion were undergoing defaults and restructurings. Among them, 16 were from Latin America, with Mexico, Brazil, Venezuela and Argentina totaling 74 percent of that soon-to-be-restructured debt. Approximately USD 37 billion was owed to the eight biggest US banks, a sum equal to 147 percent of their capital reserves of the time. The situation in Argentina was only normalized in 1992, making use of the US’ <a href="https://www.investopedia.com/terms/b/bradybonds.asp">Brady Plan</a>.</p> <p>The <strong>fourth episode</strong> was that of 2002. Transitional President Adolfo Rodríguez Saa announced in December 2001 that Argentina would suspend its foreign debt payments to congressional applause. Only nine years after the Brady Plan, Argentina’s debt amounted to twice as much as in 1992. As a share of GDP, it soared from 50 percent in the 1990s to 200 percent in 2001. Those rising debt levels had a lot to do with the recession that started in 1998 and the free fall of 2001. The IMF has been accused of being responsible for this crisis, but it was ultimately down to Argentina’s political class.</p> <p>The <strong>fifth episode</strong> starts during the end of Mauricio Macri’s government in August 2019. Macri had come out of default in 2016 but was back in serious debt trouble at record speed. He resorted to the IMF in May 2018 and suffered an additional loss of confidence after losing the 2019 primaries. Incapable of rolling over short-term dollar notes (LETES), Economy Minister Hernán Lacunza unilaterally modified the date of their capital payment. That problem is still ongoing, with Martín Guzmán repeating a similar credit event earlier this year.</p> <h2><strong>Another four events</strong></h2> <p>There’s another four events that are often counted as Argentine defaults but that weren’t really that.</p> <ul> <li>A provincial-only debt default in 1915.</li> <li>A provincial-only debt default in 1930, in which Argentina was actually commendable for being one of the very few countries that dealt with its financial obligations on time, while other 9 Latin American countries went into full default and another 4 barely made interest payments. Argentina was the exception among the continent’s debtors, as Colombia would be later in the 1982 debt crisis.</li> <li>A 1956 agreement with the Paris Club, whose goal was precisely to avoid default and restructuring. It was the first Paris Club meeting, only ten years after the creation of the IMF and the World Bank in Bretton Woods, and Argentina had obligations pending with the United States, as well as additional debts incurred by the 1955 “<em>Revolución Libertadora”</em> government that ousted Juan Domingo Perón. President Eugenio Aramburu added new debt to try to boost foreign trade but he couldn’t pay back the USD 700 million. France’s Finance Minister invited 11 countries to which Argentina owed money to analyze how to re-finance that debt between May 14 and 16 in 1956.</li> <li>The 1989 Plan Bonex. After the failure of his first economic program, President Carlos Menem put the economy in the hands of Antonio Erman González, who had to deal with a huge internal debt problem. By December 1989, 30-day fixed-term deposits were paying more than 400 percent in interest rates. To deal with this reality, the government announced a compulsory exchange of all fixed-term deposits of more than 1 million Australes (Argentina’s currency at the time) for longer-term bonds known as Bonex 89, which matured a decade later, via a presidential decree. Estimates say that confiscation of deposits amounted to 60 percent of Argentina’s monetary base, leading to a strong recession. In practical terms, this was also a default, but of internal instead of external debt.</li> </ul> <p>What can we conclude out of all of this? Argentina has been spending above its possibilities for 200 years, no matter what political party is in charge, or even if it’s a military government. That expenditure was very often financed through debt. And although defaults came with some haircuts on occasions, it is ultimately through taxation that these debts are paid. Argentine politician’s favorite tax has always been inflation, which has destructed the value of the currency. From 2001 to this date alone, the peso lost 98 percent of its value when compared to the US dollar, even though the dollar also lost value during that period.</p> <p>Argentina is now going through a new default that can still get deeper, even if negotiators strike a deal in the coming weeks, so its assets should continue to be seen as risky.</p> <p>

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Miguel Angel Boggiano

Miguel Boggiano is the founder and CEO of Carta Financiera and teaches Behavioral Finance at the University of San Andrés. He has an Economics Master’s from the University of Chicago and a public career in trading and financial analysis, with frequent appearances as guest specialist in Argentine print, TV and radio.