Originally Published in Project Syndicate. Read the entire story here.
Argentina’s creditors are being asked to accept a proposal that would reduce their revenue stream but make it sustainable. A responsible resolution will set a positive precedent, not only for Argentina, but for the international financial system as a whole.
By Joseph Stiglitz, Edmund S. Phelps, Carmen M. Reinhart – May 6, 2020
The COVID-19 pandemic has pushed humanity toward the worst global recession in modern times. Pressure on public finances has become enormous, particularly in developing countries that were already highly indebted.
The World Bank, the International Monetary Fund, and the United Nations have launched various initiatives to relieve the public debt burden in this extraordinary situation. As a first step, the G20 countries agreed to grant a moratorium on official bilateral debt of the world’s 76 poorest economies.
This moment poses the ultimate test of the international financial architecture. “Sustainability” is a term that is now ubiquitous in global finance and investment, and for good reason. The principles it embodies – such as in the UN Sustainable Development Goals – speak to building a better world. And those principles are deeply relevant when it comes to the sovereign debt of struggling developing countries.
Against the backdrop of this global emergency, Argentina is spearheading its public debt-restructuring process in a constructive manner, in good faith, and with the support of all domestic political sectors. Since 2016, when the country regained access to international markets, external creditors made a bet by acquiring debt with high coupons, but compatible only with extremely robust growth rates that did not materialize. In February, before the COVID-19 crisis became acute, the IMF concluded that Argentina’s public debt is “unsustainable.” There is consensus that the debt is unaffordable, with interest payments having doubled as a share of government revenue. To be blunt, the cost of refinancing has become excessively high.