Argentina's Debt Situation Is Unsustainable

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Whoever wins Argentina's presidential election, the next administration will be conditioned by Argentina's debt burden. Repairing its standing in international financial markets has been important for Argentina for more than a decade. However, dwindling cash reserves and a return to default in 2014 because of extended litigation with holdout lenders has added urgency to the matter.

Argentina's unresolved debt issue has exacerbated its capital constraints. The country largely has been locked out of international capital markets since the 2001 default, preventing the government from issuing new bonds. Since 2012, Argentina has been paying off debt with its foreign currency reserves, which have fallen to approximately $31 billion as of February. The government can access only $15 billion of these reserves immediately in liquid cash because it is reporting currency set aside for debt payments as part of its freely usable reserves. The money is still in the central bank, but its use is already accounted for in upcoming debt payments. Lower foreign currency reserves also make it harder to defend the value of the peso and prevent capital flight.

Despite Argentina's declining stock of dollars, the government has enough cash flow for the remainder of President Cristina Fernandez de Kirchner's term to allow her to delay making any deals with the holdout lenders. Maintaining a hard line against the "vulture funds" has been a hallmark of the Fernandez administration, and despite renewed negotiations between Argentina and the holdouts, the task of finding a solution is expected to fall to the next president. The debt situation is not an immediate crisis requiring resolution before the election, but with Argentina's reserves declining, it is unsustainable.

The amounts of public debt due in the next three years — $11.8 billion this year, another $7.3 billion maturing in 2016, and a further $12 billion in 2017 — suggest that the next president's best play will be to make an agreement with the holdout lenders to schedule payment for 2016, when its debt obligation is at its lowest. Such a deal would rectify Argentina's standing in international markets.

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