President Mauricio Macri’s administration is preparing to send plans to Congress on Monday to reschedule Argentina’s long-term debt, after rating agencies said the country had defaulted on its short-term obligations last week.
The measures are part of Mr Macri’s attempts to stave off a full-blown debt crisis by changing the repayments schedule for up to $50bn of obligations.
Argentina’s central bank was also making preparations over the weekend to try to shore up foreign reserves, the country’s media reported, after the government last week failed to sell new short-term bonds, leaving it struggling to find the cash for hefty upcoming repayments.
The peso fell by 26 per cent against the dollar during August.
The crisis comes less than two months before an election, damaging the president’s economic credibility and cementing Alberto Fernández, the opposition presidential candidate, and his Peronist party as firm favourites.
But the further the crisis deepens the more difficult it would be for Mr Fernández to run the country. That has forced the opposition leader to tread a fine line between moderation in a bid to calm markets and fierce campaign attacks on the government.
Gustavo Marangoni, a Peronist and political consultant, said Mr Fernández was “playing good cop, bad cop”.
“In a highly unstable situation, there are no guarantees [as to what might happen],” he said. “It is a very complex dilemma . . . On the one hand you have the logic of competition; on the other hand you have the logic of co-operation to avoid collapse.”
Almost two decades ago a Peronist-dominated Congress burst into rapturous applause as foreign debt payments were suspended during the country’s 2001 financial crash.
This time around they must choose between co-operating with the government in clarifying how future debt payments will be made, or taking a more aggressive stance that could risk prolonged instability.
The debate in Congress “will give the first signal of what kind of administration we can expect going forward. But there are a lot of factions in the opposition, and it’s not clear which will have the upper hand, especially when it comes to economic policy,” says Jimena Blanco, head of Americas research at Verisk Maplecroft, a risk consultancy.
Many Peronists say that the government is merely aiming to shift some of the responsibility for Argentina’s financial situation on to the opposition, said one influential Peronist lawmaker.
“Now is not the time to do this. I don’t see much future [for the proposed law] . . . It sets off alarm bells that it is the first time the government is involving Congress in [this] debt situation,” added the lawmaker, pointing out that Congress was not consulted when Argentina rushed to the IMF for a $57bn bailout amid a currency crisis last year.
Mr Marangoni believes it unlikely that the government’s debt proposals will pass in Congress. “How can the opposition contribute to reprofiling debt that it never approved of in the first place?” he asks. Argentina’s debt burden has doubled during Mr Macri’s four-year term.
Mr Macri’s opponents suspect that the restructuring of all debt is unnecessary. They accuse the government of trying to avoid making short-term debt payments before the end of its term in December to free up central bank reserves in an effort to prevent the exchange rate from spinning out of control.
However, if the opposition does not co-operate with Mr Macri in Congress, the risk is that the situation will deteriorate further.
Ignacio Labaqui, an analyst at Medley Global Advisors, said that Mr Macri and Mr Fernández were caught in a game of chicken. He argued that the government was in effect threatening to leave the central bank without liquid foreign exchange reserves — just as Mr Macri received it when he took power in December 2015 — if Mr Fernández does not co-operate.
“Everything is going to get worse, unless there is a minimum of dialogue between the government and the opposition — and there will be no incentives for that until a president is elected,” said Mr Labaqui.
He thinks the opposition will favour “something more aggressive than a mere lengthening of maturities”, adding that Argentine bond prices already reflect the likelihood of a “haircut” that would force bondholders to accept a loss on their investments.
Meanwhile, it will try to negotiate with the Fund “from a position of strength, taking advantage of how deeply involved it is with Argentina,” he added, pointing out that Argentina is by far the IMF’s biggest debtor, accounting for almost half of its loan portfolio.
Ms Blanco said: “If [Mr Fernández] goes too far he could end up with the country in chaos. I don’t think it’s in the country or his party’s interest to make the situation worse.
“It’s a very dangerous game.”