Both Argentina and Its Creditors Need to Play Their A-Teams

Ever since the return of democracy, power transfers have been messy affairs in Argentina. During this period, each incoming administration inherited a challenging economic situation and investor caution in the face of future policy uncertainty starkly revealed Argentina’s macro imbalances. From a political and economic standpoint, today’s election is no different: the future president will inherit stagflation, closed markets, and a collapsing demand for pesos. However, unlike the Menem/Alfonsín and Five-Presidents/Duhalde transitions, the stakes are now much higher. Argentina’s next president will have a short window to restructure Argentina’s sovereign debt before falling once more into a disorderly default leading to a deepening of output contraction and a spike in poverty levels from the already elevated ones. That takes out of play previous Argentine incoming presidents’ playbook of appointing a “fuse” Minister of Finance to ride the inertial remainder of the socio-economic downdraft, reserving its best candidate to administer the recovery from the bottom. Indeed, the bottom is not one single, inevitable number this time around, but a bimodal distribution of outcomes with one of the minima being a catastrophe ensuing from a disorderly default and the other a milder momentum recession leading to the likelier implementation of policy initiatives leading to a credible medium-term non-trivial primary surpluses. Thus, a timely return to growth will require a Finance Minister who: Understands debt sustainability beyond the crude IMF workbooks but not inclined to experiment with unsupported theories of growth; Has the necessary negotiating skills to: Defend and obtain IMF buy-in of his or her sustainability analysis; Articulate a credible path to sustained medium-term primary surpluses; Is capable to defend Argentina’s “highly likely to repay” access status with the IMF in order to avoid wanton conditionality which could lead to private sector growth-destroying sanctions (in the Rogoff-Bulow sense), especially the imposition of principal haircuts and/or contractual interest reductions; Can work cooperatively with all creditor constituencies (domestic, international, Argentine law, New York law, real-money, alternative, etc.) to achieve a consensual maturity extension reconciling the implied NPV reduction 1 – \alpha = e^{-r(T’-T)} against the need to placate the Fund by offering time-subordination of private debt in addition to the structural subordination it already enjoys. Has the required gravitas and credibility with the IMF to persuade it of the need for a not overly restrictive 2020 fiscal policy in exchange for the delivery of plausible substantial primary surpluses in 2021 and beyond. On the other hand, Argentina’s creditors will have to be mindful of the unique “need for speed” this restructuring requires because they, for the first time, face the “melting ice cube” paradigm present in many corporate restructurings but rarely in sovereign ones. Indeed, each passing day without a resolution will lead to further value-impairing capital flight and a deepening recession resulting in reduced political maneuverability by the government as a consequence of the inevitable escalating social pressures. In fact, creditors need to start thinking critically about a strategy which will this time need to be more Matlab than Excel and essentially partner up with Argentina to avoid the lose-lose that would be associated with a disorderly default. To state the obvious, time is of the essence for creditors as much as it is for Argentina and they cannot afford either distractions from their central goal or grandstanding. Thus, this unique situation requires creditors to: Organize cohesively to avoid the kinds of infighting which could be admissible in “leisurely” restructurings; Achieve the representation of blocking minorities in the issues subject to CACs to preserve leverage; Quickly develop a realistic and credible debt sustainability analysis which can achieve Argentine buy-in with relative ease; War-game the three-dimensional (Argentina, IMF, private creditors) negotiation in order to develop the best tools and arguments conducive to the path of least resistance consistent with recovery value maximization; Use the time available until the commencement of negotiations to challenge themselves with rigorous but divergent-convergent innovative thinking. Note: Today is Sunday and I write these lines as Argentines are casting their votes. Although I’m not best known for intellectual laziness, I have no data permitting me to override the conventional wisdom of either a Fernández first-round victory or a clear path to prevailing in the second round on which this post relies.