Does Another Debt Crisis Await Argentina?

Argentina has been in the news lately, and when this happens, it is normally not for good reasons. Once again, investors are worried that Argentina may default on its external debt. This speculation is a repeat of what happened during 2008 and 2009, and it seems to be more related to internal political fights than to the current condition of government finances, even though government finances have … Argentina has been in the news lately, and when this happens, it is normally not for good reasons. Once again, investors are worried that Argentina may default on its external debt. This speculation is a repeat of what happened during 2008 and 2009, and it seems to be more related to internal political fights than to the current condition of government finances, even though government finances have continued to deteriorate. This speculation is also related to the fact that Argentina is still negotiating with holdout bondholders from the 2005 restructuring of its defaulted external debt. Argentina’s access to the international financing markets has been closed since it defaulted on its debt in 2001, and some investors holding about $20 billion in defaulted debt did not accept the government’s debt renegotiation in 2005. While we do not expect Argentina to default during the next several years, the seeds of a potential default are being planted today. First, the administration is using stocks to pay for what it owes instead of relying on its cash flow. Second, the government is tampering with inflation numbers in order to pay less in interest on some part of its current debt. Third, government expenditures are growing too fast for fiscal sustainability, especially if the economy does not make a strong recovery. Thank you for your interest in Wells Fargo’s Economic Commentary by Email. You are receiving this message because you have requested Economic Commentary information and updates sent via email. If you no longer wish to receive these emails, please click on the following link to access the Economic Commentary by Email registration page: http://www.wachovia.com/economicsemail.