Argentina’s financial situation is at a critical point, with serious difficulties in meeting its debt obligations, which could lead to a restructuring. Despite some progress in fiscal adjustment, the government’s resistance to devaluing the exchange rate is generating uncertainty and concern in the markets.
The vice president of Moody’s risk rating agency, Jaime Reuschecommented that financial markets see it as unlikely that Argentina will be able to meet its debt obligations, opening the door to a possible restructuringHe also expressed concern about the government’s resistance to devaluation.
Regarding the reasons behind the high country risk, which exceeds 1,500 basis points, the official from the risk rating agency explained that “it is a rather complicated moment due to the increase in payments of external bond debt that Argentina is facing. This year, payments must be made for more than US$2,000 million, and next year that figure increases to US$5,000 million,” Reusche said in an interview with Radio with You.
“The markets have valued some adjustments made by the new Government, considering the complicated starting point, but they believe that it will be difficult to meet all debt payments. The accumulation of reserves, which advanced in the first half of the year, has slowed down, and this is causing concern in the markets, which anticipate the need for a restructuring of the external debt.“.
Moody’s Base Case Scenario
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Photo: Moody’s
“Our baseline scenario, and the reason why we have not altered the risk rating, which is already quite low, is that there is a high probability of a debt renegotiation or exchange, similar to what we have seen in the domestic market,” he added. He recalled that “several domestic debt swaps have been carried out in the local financial market, which have led to losses, and our expectation, like that of the markets, is that something similar will occur with external debt.”
Reusche explained that external financial flows are very tight. “If we analyse the flows, Argentina receives approximately US$100 billion each year, but the outflows between imports, payments and capital outflows also add up to around US$100 billion. This leaves a very small margin to cover all commitments, including debt payments, which are around US$5 billion.” He added: “The accounts are so tight that any variation in these variables can leave everything very tight. That is why the financial markets are concerned about the possibility of meeting all debt commitments.”
On the government’s economic approach, Reusche acknowledged the positive impact of fiscal adjustment in reducing inflation. However, he expressed surprise at the government’s reluctance to adjust the exchange rate.In our baseline scenario, after last year’s devaluation, another one should occur this year to close the gap between the parallel and official dollar.“In our view, this reluctance is preventing the necessary adjustments in external accounts, which is worrying,” he said.
Regarding the social acceptance of the adjustment, Reusche mentioned that “there are countries in the region where there is always resistance to adjustment measures and reforms, something we have considered. We were surprised by the intensity of the fiscal adjustment, as we expected greater social rejection, but the adjustment has progressed better than expected.
However, as regards devaluation, it seems that the government perceives a limited scope to implement this policy, given that a devaluation would inevitably lead to an increase in inflation. It is in a public policy dilemma, where it does not want to affect society too much, but at the same time needs to adjust the external accounts through a devaluation,” he concluded.
Source: Ambito
