Argentina was already in an economic crisis whose depth was hard to fully grasp without comparing it to the worst in the country’s history. The COVID-19 pandemic has now added an exogenous shock to a mix that previously included a collapsing currency, fragile state finances, an ice-cold private sector and large amounts of distressed debt.
War analogies are becoming the norm, and Argentine economists are no exception to the trend, with talk of a “war economy” increasingly common across the spectrum.
That means that, as many areas of the economy will be paralyzed overnight, the deepening of the recession will be inevitable. And as is often the case in war times, money printing, cash handouts and payroll subsidies will likely increase to finance the efforts and keep families and businesses above water.
Big recession, little firepower
The latest JP Morgan forecasts are looking at an 11.6 percent contraction for Latin America in the second quarter, with a recovery later in the year. But that recovery depends on the social distancing and quarantine measures being rapidly successful, which is not a sure thing given that winter will add increased complexity in the third quarter, especially in the Southern Cone.
“We economists are not health experts, so we cannot know how long the crisis is going to last. Last week, we adjusted our recession forecast for Argentina to -2% GDP in 2020, but that figure is already old, the contraction is certainly going to be bigger,” Ecolatina’s Matías Rajnerman told The Essential.
“The closest comparison I can make is that of the 2008 financial crisis. The 2009 recession was really significant in the country (-6 percent of GDP), but there is a big difference: Argentina had a surplus of 2.5 percent of GDP at the time, so it had a lot of room for counter-cyclical spending,” IERAL’s Jorge Vasconcelos said.
Argentina not only raised public spending by 3.5 percent of GDP during the 2008-9 crisis, but also nationalized its pension system in late 2008 and used part of those resources (which are not included in budget figures) for further stimulus, creating the massive Universal Child Allowance scheme in 2009, among other programs.
That recipe succeeded in turning the economy around at the time, with the country growing by 10 percent in 2010 and the Kirchnerite government re-elected by a landslide in 2011 – recovering from the defeat in the 2009 mid-terms.
But after a decade of crisis and stagflation in which many resources have been spent with little results, neither the Argentine state nor its private sector has that kind of ammunition anymore. So the policies to cope with this new crisis are likely to be less effective.
Still, given this bleak context, Alberto Fernández’s economic team has already announced a series of palliative measures, which are likely to continue growing in the coming weeks. These include:
- A one-time, 3,000 pesos extra payment for minimum pensioners and Universal Child Allowance beneficiaries this month
- The re-launch of the REPRO (productive recuperation) program, which was at the heart of the efforts to combat the effects of the 2008-2009 crisis, subsidizing firms in arrears as long as they don’t make any firings or downsizings
- The elimination of payroll taxes for firms in the most affected sectors, such as entertainment and tourism
- The expansion of public works investment by 100 billion pesos (which, according to analysts at the Balanz brokerage, will amount to 0 in real terms due to the effect of yearly inflation)
- 350 billion pesos in subsidized Central Bank credits for small and medium enterprises (which could result in an expansion of up to 20 percent of circulating pesos)
- 18 billion pesos to improve work-from-home technologies
- An expansion of unemployment insurance sums (which only reach a small minority of the jobless population)
- And at least half a dozen more relief measures.
According to several analysts, more is likely to be still needed, as many groups remain unprotected with this week’s batch of announcements.
“Half of our workers are independent or unregistered, and exposed to a strong drop in income over the coming months. Increasing Universal Child Allowance benefits helps part of this group, but leaves a large section of the lower-middle class uncovered,” Elypsis’ chief Eduardo Levy-Yeyati said.
“I would keep it simple. The state should help business owners to pay their salaries. This will allow people to have the peace of mind to go home, if their livelihoods are secured,” Carlos Melconian argued.
Fiscal discipline out the window
What’s clear is that fiscal discipline has, for the time being, gone out the window, in line with most other countries in the world. Even Melconian, a renegade adviser of former president Mauricio Macri who chastised him for not being fiscally consistent, said the situation justifies putting his rulebook on the side for the moment.
“This does not mean the triumph of Keynesians or the end of neoclassical economics, you know I don’t believe in throwing money from helicopters, but this is something we need to do for as long as this emergency lasts,” Melconian said. “You cannot follow the textbook of ‘don’t print money because it creates inflation,’ we are dealing with a shitstorm.”
Before the COVID-19 crisis, Economy Minister Martín Guzmán, a heterodox academic, was hoping to avoid further budget cuts thanks to debt renegotiation, but had said he was not looking to expand spending either. That has now all changed.
“This week’s announcements mean 2 percent of GDP in additional spending,” Rajnerman estimated. And it could only be the start. “The monetary and fiscal injections we are seeing in Europe right now are massive, amounting to almost 10 percent of GDP,” he said.
Default more likely
As for debt re-negotiations, it’s clear now that Guzmán’s goal of wrapping them up by the end of the month is no longer realistic.
With Argentina’s country risk index, which measures the spread between local bonds and US treasuries, now soaring near the 4,000 points mark, markets are clearly pricing that the chances of a full debt default are higher.
This means that bonds are also trading at parities below 30 percent, in the range of so-called “vulture” funds, which buy distressed assets on the cheap and then sue for full repayment, with deep pockets that allow for drawn-out legal battles. Hedge funds led by Paul Singer’s Elliott Management bought Argentina’s 2001 defaulted bonds and waited patiently until 2016 for full payment, while most investors settled for half of that or even less.
This adds further problems to Guzmán, whose priority was to avoid default by getting a majority of bondholders to accept a deadline extension with a haircut. If the threshold to trigger the collective action clauses is reached, minority bondholders are forced to accept the decision of the majority. Big enough hostile minorities could endanger that strategy.
A majority of analysts believe a default would accelerate Argentina’s crisis, although others think it is already inescapable.
Rajnerman argues that capital flight would accelerate with a default, and the peso would fall further in black markets, making imports more expensive at a time of high economic stress. “The government would be forced to choose: either accept a devaluation of the official peso-to-the-dollar rate as well, or start limiting imports even further. Prices would go up, consumption and salaries would go down and recession would steepen.”
According to Melconian, local-debt will suffer the most, and likely be unilaterally re-profiled, while an agreement with international bondholders will still be pursued.