With bond buyback Argentina raises fears of another economic collapse
In fact, this is only a bit lower than the level (53%) immediately before the 2001 mayhem which had seen the economy shrivel by 15%, unemployment rate mount to 21% and poverty engulf 56% of Argentines. Moreover, the current estimate also does not include $23.5 billion in debt held by the holdouts (those who refused to accept the terms of the 2005 restructuring). If this is included, the ratio is surely over 60% of GDP.
So, while Moody’s has lowered its outlook on Argentina from ‘positive’ to ‘stable,’ S&P has cut its rating from B+ to B. Raison d’être, the risk premium on Argentine bond has soared to 670 bps. Accepted, the cost of servicing of debt has been low in Argentina, but even so, to service its debts, the government needs to find an extra $2.5 billion in 2009. Certainly Argentina’s forex reserves, which stand at $47.8 billion, provide a great cushion, but, then how long? Principal & interest payments are to climb from about $14.6 billion this year to $18.6 billion next year and $17.1 billion by 2010. Even the galloping inflation has further raised the spectre of economic crisis. While government data puts annual inflation at 9.1%, private estimates place it above 25% (S&P). In fact investors have already shown signs of nervousness. Result: A capital flight of $8 billion in 2008. Certainly after six years of rapid growth (8.3%), Argentina once again seems to be standing at the verge of another economic collapse! And if this time it takes a wrong course, nothing will save it. Not even a good rain at the Pampas!
In fact, this is only a bit lower than the level (53%) immediately before the 2001 mayhem which had seen the economy shrivel by 15%, unemployment rate mount to 21% and poverty engulf 56% of Argentines. Moreover, the current estimate also does not include $23.5 billion in debt held by the holdouts (those who refused to accept the terms of the 2005 restructuring). If this is included, the ratio is surely over 60% of GDP.
So, while Moody’s has lowered its outlook on Argentina from ‘positive’ to ‘stable,’ S&P has cut its rating from B+ to B. Raison d’être, the risk premium on Argentine bond has soared to 670 bps. Accepted, the cost of servicing of debt has been low in Argentina, but even so, to service its debts, the government needs to find an extra $2.5 billion in 2009. Certainly Argentina’s forex reserves, which stand at $47.8 billion, provide a great cushion, but, then how long? Principal & interest payments are to climb from about $14.6 billion this year to $18.6 billion next year and $17.1 billion by 2010. Even the galloping inflation has further raised the spectre of economic crisis. While government data puts annual inflation at 9.1%, private estimates place it above 25% (S&P). In fact investors have already shown signs of nervousness. Result: A capital flight of $8 billion in 2008. Certainly after six years of rapid growth (8.3%), Argentina once again seems to be standing at the verge of another economic collapse! And if this time it takes a wrong course, nothing will save it. Not even a good rain at the Pampas!
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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