Urgent need for a new financial system during COVID-19 pandemic

By Maria Haro Sly and Pablo de las Heras Source:Global Times Published: 2020/5/11 14:20:47

Photo: Xinhua

Argentina is near a new default of "its" debt. It is "its" debt because the debt cycles in Argentina - like in most of the developing countries - are always a complex process of facts in which injustice are most of the time the rule. In the enormous majority of cases, it is an intricate process in which financial creditors and irresponsible co-opted elites plot against development. Few benefit from it, all of us pay and repay the bill. It is like a snowball that keeps growing - no matter how much the countries pay - which limits the present and future considerably and the real possibilities of sustainable developmental paths.

Argentina's current debt restructuring is the consequence of Argentina's third historical cycle of external indebtedness. The international context in which the restructuring process takes place has changed dramatically in recent months as a result of the spread of the COVID-19 pandemic, becoming a more uncertain world. The governments of all countries had to promote generalized quarantines and as a consequence, there is a brake on the world economy. The response in developed countries was to promote important fiscal and monetary stimulus packages, which led to a reduction in their reference interest rates. The emerging countries with less space also promoted these measures, although they suffered a significant capital outflow and many of these countries are at risk of not only a humanitarian crisis, but a financial crisis. For Argentina, the debt before the pandemic was difficult to pay, now it is simply impossible.

These days, Alberto Fernández's government is trying to restructure 21 bonds for a total of $66.2 billion. The new management's debt strategy aims to recover the sustainability of the debt on the basis of three axes: extension of terms and a grace period of the new debt structure, a significant decrease in interest rates and the reduction of capital owed guarantee solvency.

The offer presented by the government, in general terms, aims to achieve an average reduction of 63 percent in interest, 5.4 percent of principal, and a three-year grace period on the new bonds. Against the eligible bonds, the government offers a total of 10 new instruments with maturities in 2030, 2036, 2039, 2043, and 2047, with different exchange ratios. The offer seeks that the new bonds have an average interest of 2.6 percent, seeking to pay nothing until 2023 and starting to raise the coupons thereafter. 

The proposal achieved a great consensus domestically, some world leaders back it, and more than 140 prominent economists support it like Nobel Prize winner Joseph Stiglitz, Edmund Phelps, Mariana Mazzucato, Jeffrey Sachs, and Yu Yongding, among others.

It is difficult to know what will happen in this changing world. However, it is expected that creditors probably will not agree. Argentina will need to find more and more political allies to twist the arms of finance in this particular context of the world.

The situation raised many questions. Is it possible to pay a questionable debt in the context of a pandemic? How many countries will default if the financial system does not make concessions? Is it moral to ask developing countries to sink in cyclical debts crises that never solve any problems but generate more? Will the financial system continue with this banality of evil logic in which they support wealth concentration and condemn the enormous majority of the population to poverty without any kind of responsibility?

China is increasing its role as a financial player. The loans should be attached to real development projects and solutions. If the world is taking a new path of development by promoting a community with a shared future, the current trend of financial institutions should be redrawn.

Maria Haro Sly is a scholar at Renmin University of China. Pablo de las Heras is an economist at University of Buenos Aires. bizopinion@globaltimes.com.cn


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