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How the Argentine Debt Agreement Helps

Argentine Debt AgreementArgentina has been facing a long-lasting economic crisis, further amplified by the COVID-19 pandemic. Close to half of the population lived in poverty in the second quarter of 2020, reaching an all-time high during the months of mandatory lockdowns. Due to the pandemic, the country also experienced a loss of 3.5 million jobs and unemployment rose to 13.1% in the second quarter since the closures hit small businesses hard. As a result, the impact of COVID-19 significantly hurt the domestic market. The Argentine debt agreement hopes to improve the financial crisis in Argentina.

The Argentine Debt Agreement

To help Argentina with its growing financial crisis, the Ad Hoc Group, Argentina Creditor Committee and the Exchange Bondholder Group have come to an agreement that will provide Argentina with financial relief in terms of its national debt. This relief is a major advancement in expanding Argentina’s access to international capital markets. The agreement lays the foundation for future sustainable fiscal policies that support the economy. Moreover, the debt agreement entails a lift of sovereign bonds by an average of 8.7%. Ultimately, Argentina is actively working toward providing sufficient cash flow within the economy to address rising economic concerns. This agreement also allows Argentina to avoid “protracted and costly legal proceedings with bondholders.”

Restructuring the Economy

The three creditor groups developed the debt agreement to restructure $65 billion worth of accumulated Argentinian debt. The creditors involved will receive 55 cents on the U.S. dollar. Originally, the president of Argentina, Alberto Fernandez, desired to pursue 39 cents. The Argentine debt agreement covers 20% of the public debt of Argentina, which amounts to $323 billion. This presents only a partial solution to Argentina’s financial crisis but will certainly help the country move toward economic stability.

If Argentina defaults on the debt, there are possible consequences. By defaulting, creditors will not be eager to invest in Argentina. Diminishing debt through repayment shows commitment but will lead to less investment in the domestic development of the country through social programs, pension benefits, unemployment packages and more. However, the agreement is a step toward solving the rest of the economic dilemma. It utilizes the restructuring method, which provides Argentina with a long-term plan for rebuilding the economy.

Moreover, the agreement modifies the dates of payment for certain bonds. The modification that will be implemented “will improve the value of the proposal for creditors.” Multifarious investors are interested in the profit restructuring will produce and are betting on a boost in the economy.

Negotiating Future Monetary Policies

Argentina’s debt restructuring does not end there. Argentina and the International Monetary Fund (IMF) will discuss Argentina’s plans on refinancing its $45 billion debt to the IMF. The focus will mostly be on loans maturing between 2021 and 2024. During this period, the International Monetary Fund will hold Argentina accountable for certain economic obligations. This accountability entails that Argentina must utilize “credible economic data” as proof of Argentina’s economic recovery path.

The Road Ahead

Debt relief is an effective solution to addressing Argentina’s financial crisis and rebuilding a resilient economy. Negotiations with creditors involve the nation requesting reasonable interest rates from now on, which will allow Argentina to truly stabilize. The agreement is very desirable as Argentina is also navigating the added impacts of COVID-19. In general, this revamped economic plan will not solely benefit Argentina but also the international financial system. By setting new precedents, Argentina can effectively re-enter the global market, ultimately contributing to global economic growth as a result.

– Lauren Tabor
Photo: Flickr

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Global Issues: The Debt Crisis During COVID-19

the debt crisisBefore the COVID-19 pandemic, the poverty rate was expected to drop to 7.9% in 2020. But, according to the president of the World Group Bank, the pandemic may cause more than 1.4% of the world’s population to fall into extreme poverty. Since March 2020, these countries have seen lower export prices, less capital and remittance inflows and shrinking tourism revenue. Many low-income countries are facing limited resources and weak institutions that prevent them from supporting their economies. Furthermore, the debt crisis has only worsened the economic situation of developing countries during COVID-19.

The Global Debt Crisis

Half of low-income developing countries entered the pandemic with high public debt. The U.N. hoped to raise $10.19 billion to help the poorest countries during COVID-19 but only managed to raise $2.8 billion. With 150 million people threatened to fall into extreme poverty, experts are worried about the long-term economic effects of the debt crisis.

The debt crisis is becoming increasingly more destructive in many countries. The borrowing of money is occasionally controversial because citizens are not always aware of the purpose of a loan or its terms and conditions.  Sometimes these loans are used to benefit a small group of people in the country. In 2020, low-income nations were expected to pay at least $40 billion to service debts. The 76 countries with the lowest incomes owe at least $573 billion in debt. These economies are forced to handle massive amounts of debt while facing rising domestic demands, dwindling tax revenues and shrinking economies.

Consequences of Defaulting on Debt

Failure to repay a debt, including interest or principal on a loan, is called debt default. According to research from the International Monetary Fund (IMF), waiting to restructure debt until after a default is associated with larger declines in GDP, investment, private sector credit and capital inflows. Several studies have suggested that debt crises result in a substantial drop in economic growth. For example, failure to repay debts will decrease a country’s rating. Debt defaults affect a country’s ability to borrow money, exclude countries from international capital markets and increase borrowing costs.  Furthermore, since international debts have to be paid back in the creditors’ currencies, it could force governments to mine their natural resources to generate hard cash, thus continuing harmful environmental practices.

The Debt Service Suspension Initiative (DSSI)

The World Bank has proposed a new idea for countries suffering from “unsustainable” debt. The Debt Service Suspension Initiative (DSSI) is a tool that global institutions have created to stave off the debt crisis, which would allow countries to pause debt repayments to creditors interested in participating. According to The New Humanitarian, if all eligible countries join the initiative, it will free up approximately $11 billion for social spending by governments. Those who sign up for the DSSI will be expected to open its books, reveal its debt and refrain from taking more commercial loans on the side. Debt intervention for the poorest countries is, however, not a new idea.

The debt crisis affects a wide group of people, many of whom already face extreme poverty. The Debt Service Initiative may be expanded at future World Bank meetings. According to analyst and executive director for global policy, David McNair, “Countries need money now to respond to the pandemic and the quickest way to do that is to basically stop debt repayments.”

Pausing Repayments to Prioritize Pandemic Recovery

The debt crisis demands attention, especially as the COVID-19 pandemic interferes with access to resources while highlighting weaknesses in developing countries’ institutions. The World Bank is focused on using a new initiative to pause repayments in hopes of freeing up money for social spending. The initiative will also steer countries away from the consequences of debt default, such as declines in investments, capital inflows and lowered ratings. The goal is to see leaders in developing nations using the pause from payments to access resources necessary for solving prominent issues in the country.

– Rachel Durling
Photo: Flickr