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Neither the Argentine state nor the country’s private sector have the money to pay their bills.
The country’s recession is deepening further as the country fights the coronavirus pandemic with an almost complete lockdown, which has proven very hard to ease even among first world countries. The accompanying drop in activity is eating away both private and public coffers, leading to bouncing checks, debt defaults and payroll delays, with the prospect of bankruptcies and firings looming close, and mass-scale money printing the sole obvious alternative.
Very few are safe
Tax collection figures for March were up by a mere 36 percent on the yearly comparison, far below the 12-month inflation numbers which last stood above 50 percent in February. The report showed a clear deterioration when compared with the first two full months of the Fernández administration, January and February, in which tax collection had averaged a 44 percent nominal increase versus 2019.
Those numbers are only likely to get worse in April, when the lockdown will be in force for the full length of the month, even though the government is looking at ways to gradually open up some low-risk areas of the economy.
Many areas in the private sector expect income to drop even more dramatically. In a meeting with President Alberto Fernández yesterday, business chambers argued that industry, construction, commerce and services will struggle to pay salaries and other fixed costs, and warned of personnel suspensions, firings and closures if no quick action was taken.
“The government needs to provide funds to pay salaries and, when things re-open, also help with working capital,” Argentine Industrial Union’s VP Daniel Funes de Rioja said. The Chamber of Commerce, meanwhile, estimated that 5 percent of firms in that sector would die off in the next three weeks, resulting in 130,000 job losses in that area alone.
According to The Essential’s own estimates, 5 million jobs (one quarter of Argentina’s labor market) have been at least temporarily lost or grind to a halt because of the lockdown, all of them in the self-employed and unregistered sectors. The possibility of additional losses in the registered areas of the labor market, which have been mostly spared so far, would mean none of the three big sectors of Argentina’s labor market are safe.
Money printing pressures
The government knows that putting registered jobs and tax-paying businesses at serious risk would lose it most of the support it has gained due to the lockdown, so big support programs are likely coming down the pipe.
But so far, support has been scarce and insufficient, given the scale of the contraction.
The Central Bank paid back ARS 300 billion it owed to commercial banks for its short-term Leliq notes (instead of rolling them over as usual), hoping some of those pesos would be used to issue cheap credit to the private sector, with the state also offering additional guarantees in case of default. But neither commercial banks nor private companies have been too interested in going for those loans encouraged by the state, with only ARS 10 billion reportedly issued, amid fears from both sides that adding leverage would not be convenient even at subsidized rates when income streams are frozen.
“Companies can’t get into debt. A firm that is bringing in zero pesos can’t be forced to go into debt to pay salaries these months (during the lockdown). How can they pay afterwards? They are going to default or go bankrupt,” economist and former Argentine stock market director Gabriel Rubinstein said this week.
As an alternative proposal, Rubinstein said the state should simply pay 100 percent of private sector salaries for those sectors it is fully stopping from working with its quarantine restrictions.
That would obviously lead to a massively large round of money printing, and Central Bank chief Miguel Pesce is resisting moves of that sort.
According to estimates from the Economía & Regiones consultancy agency, Argentina’s circulating monetary base soared from ARS 1.7 trillion in February to ARS 2.2 trillion in March, due to the aforementioned 300 billion in Leliqs cancelled by the Central Bank plus more than 100 billion in aid to the Treasury.
The cancelled Leliqs at least meant an improvement for the Central Bank’s balance sheet, but overall this will add more pressure against the value of the peso, which Pesce wants to minimize.
Provinces in arrears
Despite Pesce’s wishes, however, printing is likely to continue proving inevitable, as Argentina has almost no other place to find resources at a time of emergency.
Further evidence of this dynamic was seen over the last few weeks in the provinces. With economic activity plunging, so is governors’ tax collection, which strongly depends on levies such as gross income tax.
After pressure from the governors, who warned they wouldn’t be able to cover salaries, the Fernández administration caved in and sent ARS 60 billion in aid this week, ultimately paid through the Central Bank’s printing press.
But this still wasn’t enough to stop Córdoba, Argentina’s second-biggest province, to issue a local IOU to pay expenses (though salaries will still be paid in pesos), putting the country one step closer to the return of provincial quasi-currencies, which were used during the 2001-2002 crisis to plug local governments’ fiscal gaps.
With the COVID-19 downturn likely to continue, this dynamic is also likely to deepen during the next few months.
After having already unilaterally postponed payments for short-term notes several times during the last months of Mauricio Macri’s term and the beginning of Alberto Fernandez’s, the turn came for holders of longer-term bonds issued under Argentine jurisdiction.
These bonds were already trading at a lower price than those issued in New York, where courts are more likely to favor bondholders in judicial disputes, and which the government is seen as less likely to unilaterally stop paying.
But the odds of an international default are also growing. Economy Minister Martín Guzmán is known for opposing debt renegotiations in which creditors accept a deal that they are unlikely to be able to comply with in the future, having even written an academic book about it.
In the context of a brutal recession, bond holders should not expect Guzmán to simply continue to pay if his offer is not accepted.