Argentina’s Economic Crisis and Default

Argentina’s Economic Crisis and Default

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Updated June 15, 2020
Argentina’s Economic Crisis and Default
In 2018, the Argentine government faced numerous
Meanwhile, capital inflows into the country to finance the
economic challenges: the unsustainable buildup of debt,
deficit contributed to an overvaluation of the peso, by 10%-
rapid depreciation of its currency (the peso), economic
25%. This overvaluation also exacerbated Argentina’s
contraction, and inflation. The government, headed at the
current account deficit (a broad measure of the trade
time by center-right President Mario Macri, reluctantly
balance), which increased from 2.7% of GDP in 2016 to
turned to the International Monetary Fund (IMF) for
4.8% of GDP in 2017.
financial assistance to avoid defaulting on its debt. After
securing the largest IMF loan (in dollar terms) in the
Crisis and Initial Policy Response
institution’s history, economic conditions failed to improve. Argentina’s increasing reliance on external financing to
fund its budget and current account deficits left it
In the October 2019 elections, Mario Macri lost to the
vulnerable to changes in the cost or availability of
center-left Peronist ticket of Alberto Fernández for
financing. Starting in late 2017, several factors created
president and former President Cristina Fernández de
problems for Argentina’s economy: the U.S. Federal
Kirchner for vice president. The Peronist ticket campaigned
Reserve (Fed) began raising interest rates, reducing investor
on a reorientation of Argentine economic policies. After
interest in Argentine bonds; the Argentine central bank
taking office, the Fernández government implemented
reset its inflation targets, raising questions about its
several economic reforms and entered debt restructuring
independence and commitment to lower inflation; and the
negotiations with its bondholders, which remain ongoing.
worst drought in Argentina in 50 years hurt commodity
The COVID-19 pandemic and resulting economic turmoil
yields, significantly eroding agricultural export revenue.
further stressed Argentina’s economy, and the government
defaulted on its debt in May 2020.
Investors began selling Argentine assets, putting downward
pressure on the peso (Figure 1). With most of its debt
Economic Crisis in Argentina
denominated in dollars, a depreciated peso increased the
Argentina has a long history of economic crises. It has
value of the debt in terms of pesos. To improve investor
defaulted on its external debt (debt held by foreigners) nine
confidence, the central bank and government announced in
times since independence in 1816. It took 15 years to
April and May 2018 higher interest rates (to 40%) and
resolve Argentina’s default in 2001. Argentina has also
fiscal reforms to cut the budget deficit. Market volatility
entered into 21 IMF programs since joining in 1956. The
continued, however, and in June 2018, the Macri
current economic crisis facing Argentina stems from both
government reached an agreement with the IMF for a three-
longstanding issues and recent developments.
year, $50 billion program.
Economic Reforms but Growing Vulnerabilities
Figure 1. Value of the Argentine Peso: 2018 to date
When President Macri was elected in 2015, he ushered in a
Pesos per U.S. dollar
series of economic reforms aimed to address the
unsuccessful economic policies of the previous Kirchner
governments, which had governed Argentina since 2003.
He cut export taxes, lifted currency controls, and resolved a
15-year long dispute with holders of defaulted Argentine
bonds, allowing Argentina to resume access to international
capital markets. The central bank also raised interest rates
to 25% to curb inflation. The economy contracted by 1.8%
in 2016, but resumed growth of 2.9% in 2017.
To maintain political support for the reforms and support
the country’s most vulnerable (one in three Argentines was
living below the official poverty line in 2015), the

government held off on substantial fiscal reforms to address
Source: Global Financial Data.
the budget deficit, 4.3% of GDP in 2014. However, the
At the program’s outset, skeptics raised questions about the
Macri government saw borrowing costs rise, as it switched
fiscal cuts and growth projections underpinning the
to traditional borrowing from international capital markets
relative to the Kirchners’ unorthodox financing tools,
program. Through the program, the government committed
to ambitious and politically unpopular austerity. The IMF
including money creation and coercing domestic banks into
was aware of the potential risks when the program was
buying government bonds. The Macri government issued
approved in June 2018: IMF staff noted in program
$56 billion in external debt between January 2016 and June
documents they could not certify under the baseline forecast
2018. Interest payments facing the government caused the
scenario with a high probability that Argentina’s debt
budget deficit to increase to 6.4% of GDP in 2017.
would be sustainable, with Argentina’s external debt
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Argentina’s Economic Crisis and Default
reaching about $285 billion in 2019, an increase of more
as a deadline for renegotiating its debt, before large debt
than $100 billion since 2015 (Figure 2).
payments fell due between April and July. The deadline
Figure 2. Argentina’s External Debt
was subsequently extended several times. The COVID-19
pandemic further increased economic pressure on the
government, even as the government’s early lockdown
successfully slowed transmission. Argentina’s economy is
forecast to contract by 5.7% in 2020, and the government is
on track to run a budget deficit. The central bank is printing
money to finance the government, which risks further
inflation.
On May 22, 2020, the government missed a $503 million
interest payment on dollar bonds issued under New York
law, putting the government into its ninth default. Although
bondholders could demand immediate repayment on all
outstanding debt or pursue payment through New York
courts, negotiations are ongoing to swap the original bonds
with new bonds that would provide some debt relief

through principal and interest rates cuts and maturity
Source: IMF, Argentina: Fourth Review Under the Stand-By Arrangement,
extensions. In June, the IMF assessed that the government’s
July 2019.
revised restructuring offer to bondholders would likely
Notes: * IMF forecast.
restore debt sustainability for the government. More
Despite an IMF program and fiscal reforms, the peso
bondholders would need to accept the bond swap before it
continued to depreciate over subsequent months. To
can proceed, however, and negotiations continue.
stabilize the currency, the central bank raised interest rates
to 60% in late August 2018, the highest in the world, and
Economic Implications for the U.S.
the government committed to hastening the pace of fiscal
U.S. economic exposure to Argentina through direct trade,
reforms. President Macri requested the IMF accelerate
investment, and financial channels is relatively limited.
disbursements of its financing. In September 2018, the IMF
U.S. investors, however, are affected by the Argentine
increased the program to $57 billion and agreed to front-
default and efforts to restructure the debt.. The role of the
load disbursements of financing.
IMF also has implications for the United States, the IMF’s
largest shareholder. Argentina has historically been a
Developments in 2019 and 2020
frequent IMF borrower, and previous programs have
The Macri government pursued fiscal reforms, reducing the
encountered difficulties. Argentina’s default in 2001, while
budget deficit from 5.3% in 2018 to an estimated 2.5% in
on a sizeable IMF program, led the IMF to substantially
2019, and the IMF disbursed funds to Argentina in March
revise its lending policies. In 2018, the U.S. government
and July 2019. However, Argentina’s economy contracted
strongly supported the IMF program for Argentina, given
by 2.2% in 2019, whereas the IMF program initially
President Macri’s demonstrated commitment to improving
envisioned a return to growth in 2019. The peso’s
U.S.-Argentine relations and reforming its economy. U.S.
devaluation made it hard to tame inflation (with consumer
government views, however, could change under President
prices growing by 54% by end- 2019) and increased the real
Fernández if his government takes an aggressive position
value of Argentina’s debt (mostly denominated in dollars),
against the IMF or U.S. creditors .
accounting for about 76% of GDP in 2019.
Oversight Questions for Congress
The austerity measures and lingering recession in Argentina

eroded Macri’s political popularity. In the August 2019
In what ways is Argentina’s current IMF program
similar to and different from its previous programs?
primary election (which combined candidates from all

parties), Macri lost decisively to the Fernández, who had
Given the size of Argentina’s IMF program, what risks
pledged to “rework” the IMF program if elected. Following
does it pose to U.S. financial commitments at the IMF?
the primary, capital flight from Argentina accelerated, the
 How does the pandemic affect the government’s
peso reached a record low, and Argentina’s stock markets
financing needs? Should the terms and conditions of
dropped. President Macri subsequently shifted his
Argentina’s IMF program be revisited in light of the
economic policy approach, but still lost the election.
pandemic? What impact does the pandemic have on
debt restructuring negotiations?
After taking office in December 2019, President Fernández

pursued a number of measures that aim to revive the
Are U.S. financial institutions sufficiently capitalized
economy, including freezing utility tariff prices, reducing
and diversified to withstand a potential prolonged
medicine prices, increasing worker wages, giving tax
default by Argentina?
rebates to the most vulnerable members of society, and
For more on Argentina, see CRS In Focus IF10932,
increasing severance pay. To offset the fiscal cost of these
Argentina: An Overview, by Mark P. Sullivan.
reforms, the government enacted a number of tax increases.
Rebecca M. Nelson, Specialist in International Trade and
The government also focused on addressing public debt,
Finance
opening talks with bondholders and other creditors,
including the IMF. The government initially set March 31
IF10991
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Argentina’s Economic Crisis and Default

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