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Argentina and How to Avoid Global Financial Catastrophe

Summary:
If handled with care, this year’s debt-service payments can and should be recapitalized at low interest rates to avoid a financial pile-up. If not, 2020 will mark a devastating new chapter of global financial crisis. NEW YORK – When a single car skids on an icy highway, the result can be a 50-car wreck. So, too, with international financial markets: Mexico’s default in 1982 led to a pile-up of dozens of countries. Thailand’s devaluation in July 1997 triggered the Asian financial crisis. The Lehman Brothers bankruptcy in September 2008 set off the Great Recession around the world. How Will the Great Cessation End? PS OnPoint Olivier Douliery/AFP via

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If handled with care, this year’s debt-service payments can and should be recapitalized at low interest rates to avoid a financial pile-up. If not, 2020 will mark a devastating new chapter of global financial crisis.

NEW YORK – When a single car skids on an icy highway, the result can be a 50-car wreck. So, too, with international financial markets: Mexico’s default in 1982 led to a pile-up of dozens of countries. Thailand’s devaluation in July 1997 triggered the Asian financial crisis. The Lehman Brothers bankruptcy in September 2008 set off the Great Recession around the world.

International financiers should know better than to start the COVID-19 collapse of 2020. Their wisdom will soon be tested.

Even before COVID-19 threw the world economy into the worst downturn since the Great Depression, Argentina was in debt distress, again. As so often has happened in Argentina’s default-ridden history, a half-baked agreement with recalcitrant creditors in 2016, followed by a quick return to the bond markets, proved to be wishful thinking both for Argentina’s then-president and the country’s creditors.

Fiscal deficits undermined stability. A 2018 bailout program with the International Monetary Fund did not work. And Argentina’s debts, with their very high coupon rates, proved to be unsustainable.

Yet Argentina was hardly alone. As lax lending standards by financial markets and ample liquidity pumped out by the Fed and other central banks led many developing countries to borrow heavily in recent years, sovereign-debt distress was increasingly recognized to be a major systemic risk. A session at the 2019 IMF Spring Meetings was entitled “Tackling the Next Wave of Sovereign Debt Crises.”

Enter COVID-19. The collapse of oil prices in March, the onset of a near-global lockdown, plummeting government revenues, and gargantuan public spending for the survival of populations produced a global fiscal crisis unmatched in peacetime. The US budget deficit will soar to around 18% of GDP or higher. For dozens of emerging economies, the financial panorama could not be bleaker.

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