BUENOS AIRES (Reuters) - Argentina can avoid restructuring its bonds if policymakers reverse growth-stifling austerity measures in time to spur enough economic growth to avoid a debt crisis, Nobel Prize-winning economist Joseph Stiglitz said on Monday.
A crushing defeat for business-friendly President Mauricio Macri in the Aug. 11 primary election at the hands of his Peronist rival Alberto Fernandez unnerved investors, who worried that the return of the left to power could herald a debt restructuring in Latin America’s third-largest economy.
The peso currency lost nearly a quarter of its value last week and the price of Argentine bonds tumbled, pushing up borrowing costs. Based on Friday’s closing prices, the cost of insuring Argentine debt implied a 77% probability of a sovereign default within the next five years, according to IHS Markit.
However, Stiglitz, former chief economist of the World Bank and a critic of austerity measures during the euro zone debt crisis, said Macri’s tight fiscal policies had brought the economy to a standstill just when growth was needed to ensure Argentina can service its debts.
“The problem is that the policies the government had engaged in were not conducive to economic growth,” Stiglitz told Reuters by telephone. “Austerity and the tight budgets lead to low growth and that makes the debt less sustainable.”
Argentina’s economy is expected to shrink 1.5% this year, according to the latest central bank poll of analysts. Growth for 2020 was seen at 2.0%.
A new treasury minister, Hernan Lacunza, takes over on Tuesday with the daunting challenge of trying to turn the economy around in time for the Oct. 27 presidential election.
Fernandez, now the front-runner for the election, warned in an interview on Sunday that a debt restructuring may be necessary. He said he would seek to renegotiate a $57 billion program with the International Monetary Fund.
Fernandez says he disagrees with Macri’s austerity measures, which, while directed at cutting the fiscal deficit, have hobbled growth while battering the president’s popularity.
“I think Fernandez is unambiguously likely to have a better policy,” said Stiglitz. “Whether it’s enough to avoid the need for a debt restructuring depends on how deep the hole is that Macri dug over the last three-and-a-half years.”
Fresh from the thumping he got in the primary vote, Macri last week loosened the tough fiscal policies he had enacted under the IMF program signed last year.
In a stark policy turnaround, he cut food taxes and increased welfare spending, among other measures.
The IMF’s next review of Argentina’s economy on Sept. 15 should provide a sign of whether the lender of last resort still thinks Argentina can pay its obligations. Another crunch point will be the second quarter of 2020, when Argentina is scheduled to make $20 billion in debt repayments, up sharply from $5.6 billion in the first quarter.
Macri took office in late 2015 promising to reintegrate Argentina with the global bond market after years of being locked out due to the previous administration’s multi-year feud with holders who rejected the terms offered in the country’s previous debt restructurings.
Former President Cristina Fernandez de Kirchner, a free-spending populist and Macri’s most prominent political enemy, is running as Alberto Fernandez’s vice presidential candidate.
Argentina under Kirchner was an international capital markets pariah. Rather than issuing bonds, she used central bank reserves to fund the government while heavily taxing the farm sector and running up high fiscal deficits.
From the very low level of foreign indebtedness left by the Kirchner administration, Argentina under Macri issued too much debt too fast, Stiglitz said.
“He began with an almost clean slate and he borrowed too much. He bet big and he bet wrong,” Stiglitz said.
Reporting by Hugh Bronstein, Editing by Rosalba O'Brien