New and Old Struggles for Argentina
March 25, 2020
In a February 5 commentary, we provided an assessment of the first two months of the presidency of Alberto Fernández in Argentina. The key issues at that time were the country’s deep economic crisis and the related debt renegotiation as well as the internal power struggle of President Fernández with his Vice President (and former president) Cristina Kirchner.
A short month and a half later, Argentina’s primary challenge has become the COVID-19 virus that is expected to further worsen the country’s already serious ongoing recession. At the same time, this unprecedented health emergency is providing Alberto Fernández a unique opportunity to demonstrate his own leadership and to emerge in a much stronger position vis-à-vis his vice president. This could be the silver lining of what otherwise looks to many like one of the most complicated moments that Argentina has faced since the return to democracy in 1983.
Argentina and the COVID-19 Virus
Like all of Latin America, Argentina appeared initially far removed from the COVID-19 virus. The first case of the virus in Latin America was reported in Brazil on February 26. On March 3, the first case of COVID-19 surfaced in Argentina, and on March 7, the first death from the virus in Latin America (in Argentina) was announced. The advance of the COVID-19 virus throughout the rest of Latin America has been steady, and as in the rest of the world, it has become the singular focus of most governments of the region, with the principal exceptions being Brazil and Mexico, where populist leaders have chosen to underestimate the pandemic’s threat.
From the earliest days after the appearance of the COVID-19 virus in Argentina, President Fernández has demonstrated remarkable focus and strong leadership in assessing the threat of the virus and in taking decisive action in response. More than almost any other leader in the region, Fernández decided almost immediately to take drastic methods to limit the entry and the spread of the virus in the country. On March 16, he ordered the immediate suspension of all scheduled flights from Europe, Asia, and North America, along with mandatory self-quarantine for all travelers returning from these destinations. Only four days later, on March 20, the Argentine government announced an immediate country-wide mandatory quarantine that stopped almost all movement into the country, one of the most drastic measures taken by any country in the region. Despite these strict measures, in many locations around the country there have been large numbers of people who have ignored the quarantine. The government has responded strongly against anyone violating the quarantine, having warned, detained, or arrested over 10,000 persons in the first three days since the measure was announced. There is speculation that the country may declare a “state of siege” to reinforce the quarantine orders.
There is also much speculation about how quickly the coronavirus will advance in Argentina. An analysis of the virus in the country and summaries of health policies being taken by the Argentine government can be found on the Argentine Health Ministry site, while the website of the Pan American Health Organization (PAHO) details the advance of the virus throughout the region as well as measures being coordinated with PAHO and the World Health Organization (WHO).
How Will COVID-19 Affect Argentina’s Economic Crisis?
The unexpected shock of COVID-19 in the last weeks promises to further complicate Argentina’s serious ongoing economic crisis. A senior IMF official recently described the new economic challenges that the region faces as a result of the COVID-19 emergency. The dramatic drop in oil prices over the past weeks will not only cut into Argentina’s energy export earnings but will also make any foreign investment in the country’s non-conventional energy fields at Vaca Muerta much less likely. At the same time, as demand for other Argentine exports falls from Asia, especially for soy, corn, and wheat exports, the country’s foreign exchange balance will suffer beyond its already difficult situation.
Following the lead of European countries and the United States, the Argentine government has begun to organize social assistance programs and efforts to support the most vulnerable populations. As almost 40 percent of the Argentine workforce is in the informal sector, it was clear from an early moment that most of these workers would quickly find themselves without a regular source of income. On March 23, the government announced its intentions to provide a 10,000 peso “spot” payment to as many as 3.6 million informal heads of household. Plans are being made for distributing income support payments by means of cell phone transfers, as most of these individuals do not have bank accounts.
For a country that is already heavily indebted and without access to any further international borrowing, the expectation is that the government will be forced to print money in order to be able to implement costly emergency measures both for the population and for the country’s paralyzed industrial sector. Inflation, that was very recently estimated to be around 40 percent, could rise quickly due to any significant increase in government spending financed through monetary emissions. The impact of COVID-19 could result in a more prolonged decline in economic activity in a situation with decreased external demand for Argentine exports and an additional decline in commodity prices.
Argentina’s Debt Renegotiation
The COVID-19 virus has resulted in significant global market turbulence. This turbulence, which has helped to send the price of Argentine bonds to near record lows, has increased the expectation that the foreign bondholders of Argentina’s debt (representing more than $133 billion in “foreign-law” bonds) might be ready to accept new terms for this debt.
The Argentine government is reportedly ready (finally) to begin formal renegotiation of its outstanding foreign-held debt in the hands of private bondholders. Government representatives are expected to hold final consultations with foreign bondholders the week of March 23, and the government will make its formal offer to bondholders at the beginning of the week of March 30. Anticipating this activity, the IMF, at the request of the Argentine government, released on March 20 a detailed technical note on the sustainability of Argentina’s debt. This note follows up the IMF statement issued on February 19 that first laid out the IMF’s views on the Argentine debt situation. The IMF detailed in no uncertain terms that Argentina’s public debt is “unsustainable” and that private bondholders will need to take a major reduction in the value of their bonds through some combination of “face value haircut, maturity extensions, grace periods, and interest rate cuts.”
The Argentine minister for the economy provided his own take on the IMF notes, and for the first time ever, he laid out a detailed picture on March 20 of how the country hopes to first restructure its debt and then work toward restoring growth and economic stability on the basis of a still-to-be defined macroeconomic plan. The combination of the IMF statement and the presentation in Buenos Aires on March 20 reflects a well-coordinated strategy between the Argentine government and the IMF to lay the groundwork for what has long promised to be a difficult debt renegotiation.
Power Struggle between President Fernández and Vice President Kirchner
Since assuming the presidency on December 10, 2019, there has been extensive debate and speculation in Argentina about the degree to which President Fernández is able to make his own decisions without significant interference and second-guessing by Vice President Cristina Kirchner and the many Kirchner loyalists who have taken up positions of leadership in most of the federal ministries. The ability of the president and his more moderate and pragmatic views to prevail over the more extremist and confrontational views of the vice president on many domestic and foreign policy issues is seen as important for the country to be able to move forward in a more sustainable political and economic way.
Since the first case of COVID-19 surfaced in Argentina on March 3, President Fernández has taken charge of the crisis is a way that has both helped calm the general public and distinguish his own consensus-based leadership style. Most of the decisions he has taken over the first three weeks of the crisis in Argentina have been taken in close consultation with the political opposition in congress, and he has appeared for public announcements of new measures together with both national- and provincial-level opposition figures. It is too early to say if this new approach is something that will define the Fernández administration in the coming months and years, but it does leave some observers more optimistic that the president will be able to capitalize on this new authority to delimit the power and presence of his more extremist vice president. Without taking these arguments too far, and recognizing that the country faces very significant challenges on both the public health and the economic fronts, there is at least some hope that Fernández might emerge from the COVID-19 crisis having consolidated his authority and better placed to address the other complex challenges that Argentina has faced now for many decades.
Michael A. Matera is a senior fellow and director of the Americas Program at the Center for Strategic and International Studies in Washington, D.C.
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