Compulsory restructuring of the debt under local law

ARGENTINA - In Brief 06 Apr 2020 by Domingo Cavallo

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This morning, the government published a Decree that postpones, until the last day of 2020, payments (interest and amortizations) on the debt denominated in US dollars contracted under Argentinean law. It is the beginning of the process of compulsory restructuring of that debt that we had anticipated in our March 14 report. So, the creditors in US dollars of the Argentine Treasury should not expect any payment during the next two to four years The fiscal situation was already weak before the coronavirus crisis. The effects of the latter will in turn be larger and deeper than in most emerging economies and, of course, much worse than in advanced economies. In March, the nominal annual increase in tax revenue was only 35% year-on-year, compared to a 50% inflation rate during the period. And most likely expenditures increased at a rate close to 50%. The reduction in tax revenue, in real terms, will be larger in April because it will incorporate the full impact of the economic contraction provoked by the quarantine.The only financing source available for the fiscal deficit is money printing. The future consequences of the extreme monetary expansion in an economy that was already experiencing 50% annual inflation will prevent the rapid post crisis rebound of the economy that some economists predict for advanced economies and even, for emerging economies that were stable and growing before the corona-virus crisis. It is not certain that the rapid rebound will materialize in those economies, but considering the weaker starting point, it is certain that it will not happen in Argentina. The contraction supply effects of the social distancing measures adopted, that so have prove...