Argentina’s access to international markets is closed due to high country risk, a public debt largely denominated in foreign currency and an unstable macro economy. Reversing this scenario means making public debt perceived as sustainable. This requires conditions that have been rare in recent times: a primary fiscal surplus, relatively low country risk, some economic growth, stability and exchange rate unification. Good public debt management is essential to boost capital market development, reduce volatility, strengthen the national currency and return to growth.
Illustration: Natalia Aguerre.
Why is regaining market access important?
What is public debt and what is it for?
Public debt is not just about future financial commitments, it is a key tool for economic development. Properly managed, it can be a pillar for growth, facilitating counter-cyclical policy and strengthening local capital markets. Poor management, on the other hand, generates negative consequences, such as economic instability, increased financing costs and obstacles to private sector development.
Argentina’s public debt has historically been poorly managed. As can be seen in the graph, we rank first in the region in debt defaults. A series of ill-advised economic policy decisions have led to unsustainable public debt and, for this reason, Argentina has been closed to accessing international markets since 2018. This makes any new borrowing more expensive and makes it difficult to refinance existing commitments. Moreover, the high proportion of foreign currency debt adds pressure on international reserves, a scarce and essential resource to meet maturities.
Why is regaining market access important?
The Argentine economy must return to growth, which is impossible without regaining access to the capital market. Debt sustainability is not just a technical issue, it is a central factor for growth and economic stability. Argentina faces a circular dilemma: it needs to grow to make its debt sustainable, but such growth depends on access to external and domestic financing on reasonable terms. Debt sustainability is not only important to restore market access, but also to gradually pay off the debt owed to the International Monetary Fund.
Ensuring debt sustainability requires a comprehensive approach that combines responsible fiscal policies, careful management of external commitments and structural reforms to reduce inflation and stabilise the exchange rate. Regaining access to financial markets and implementing strategies to ensure economic growth are essential elements to address Argentina’s current public debt challenges.
How did Argentina's public debt evolve and how is it made up today?
Over the last decades, Argentina has faced recurrent cycles of indebtedness, crises and restructurings. In order to manage Argentina’s public debt over the coming years, it is essential to understand where we stand.
The country maintained low levels of external debt due to the limited availability of private international financing. The only – and scarce – financing was bilateral or multilateral.
Global changes such as the recycling of petrodollars facilitated access to international credit, rapidly increasing indebtedness.
Both the public and private sectors increased their debt. At the end of the dictatorship, the state took over private obligations and entered the 1980s with high levels of foreign debt. This resulted in interest payments that exceeded half of exports, plunging the country into a deep economic crisis.
Several factors (such as the Brady Plan, privatisations and exchange rate appreciation) helped to temporarily reduce the debt burden, but the Asian and Russian crises at the end of the decade, together with the privatisation of the pension system and the economic downturn, increased commitments again. This culminated in the 2001 default, one of the most significant in Argentina’s economic history.
The possibility of accessing international financing was fundamentally impeded by the intervention in the National Institute of Statistics and Censuses (INDEC), the conflict with the vulture funds and the holdouts. Although international reserves were used to pay public debt, exchange restrictions and economic stagnation limited progress.
The resolution of the holdout dispute allowed Argentina to return to the international markets, but the rapid increase in debt, especially in foreign currency, together with the cut-off of financing in 2018, led the country to turn again to the International Monetary Fund (IMF). This period marked a significant increase in borrowing under foreign law, a greater reliance on multilateral financing and an increase in the weight of maturities in dollars.
Argentina’s public debt has several critical characteristics. A high percentage is denominated in foreign currency, which puts pressure on international reserves and exposes the country to foreign exchange risk. Moreover, a significant fraction is held by multilateral organisations, such as the IMF, and public sector entities, such as ANSES and the Central Bank. This last aspect facilitates some internal flexibility, but does not solve vulnerability vis-à-vis external creditors.
In historical terms, current public debt is at levels similar to the peaks of the 1980s and 2000s. This highlights the difficulty of reducing indebtedness without access to international markets on favourable terms. Without responsible maturity management and a strategy to reduce the burden of foreign currency debt, Argentina’s debt sustainability will remain a crucial challenge for its economy.
How to make public debt sustainable?
What does it mean for public debt to be sustainable?
Debt sustainability refers to the country’s ability to generate the resources needed to pay principal and interest without drastic adjustments or frequent restructuring that would affect the economy.
Debt sustainability is not a fixed issue, but a dynamic analysis that depends on multiple economic variables, such as GDP growth, interest rates, inflation, the exchange rate and the primary fiscal outcome (the difference between government revenues and expenditures, excluding interest payments). If debt grows faster than the country’s revenues, it becomes unsustainable.
Projecting future scenarios to assess sustainability
A sustainability exercise involves projecting the evolution of debt in terms of future economic scenarios. In the case of Argentina, much of the debt is in foreign currency, which means that its cost is closely linked to the exchange rate and the country’s ability to generate dollars, either through exports or access to international markets. Without these sources, meeting payments becomes highly dependent on international reserves, which are currently limited.
The analysis presents different scenarios for the next decade (2024-2034), combining assumptions about economic growth, interest rates and the exchange rate. The results indicate that:
- under optimistic conditions, the debt-to-GDP ratio could be gradually reduced. However, these scenarios depend on a number of demanding assumptions: sustained GDP growth, steady fiscal surpluses and an environment of macroeconomic stability;
- In less favourable scenarios, where the exchange rate depreciates or growth is low, debt could continue to increase, intensifying insolvency risks.
What factors influence debt sustainability
Access to international markets is a key element in sustaining debt. Without the possibility of refinancing maturities or issuing new securities at reasonable rates, meeting payments becomes a challenge. In this context, the high country risk premium, which reflects investors’ negative perception of the Argentine economy, is a significant obstacle.
Debt sustainability requires comprehensive and coordinated actions. It is essential to reduce country risk through responsible fiscal policies, loosen exchange rate restrictions to attract investment and foster economic growth. In addition, there is a need for institutional reforms, such as the implementation of fiscal rules and stabilisation funds, to ensure more efficient and predictable debt management.
In sum, although Argentina’s debt sustainability is not guaranteed, it is possible with a combination of economic growth, access to financing and sound macroeconomic policies. Without these conditions, the risk of default and economic crises will remain high.
Six recommendations for making public debt sustainable (and regaining access to international markets)
For debt to be sustainable, it is essential to avoid concentration of maturities. Debt that may appear to be sustainable may not be sustainable if it is concentrated in a short period.
The current juncture requires a surplus primary fiscal outcome that facilitates the reduction of country risk, but at the same time does not hinder some medium and long-term growth, without which debt would also become unsustainable. Reconciling both objectives implies redesigning fiscal and tax policy. This surplus is key to contributing to the implementation of a macroeconomic policy that will allow the normalisation of the functioning of the exchange market and the economy as a whole.
Progress in the gradual elimination of the bulk of exchange restrictions is a necessary condition for the entry of productive capital and the reduction of country risk. This would be part of a scheme that would allow access to international financial markets under conditions more similar to those of the rest of the region and to those that Argentina had in the years following the exit from convertibility. Some restrictions and regulations should be maintained to mitigate the effects of short-term capital flows and increase the degree of autonomy to make economic policy.
Debt to private creditors denominated in foreign currency is often the most sensitive component: to repay it requires dollars or access to foreign currency financing. Its sustainability requires not only the ability of the public sector to buy dollars through its fiscal performance but also the ability of the country as a whole to generate them via trade performance or medium and long-term capital flows. This is extremely difficult without reasonable growth in the supply of tradables in the economy and financial flows such as foreign direct investment.
A significant part of our country’s public debt (approximately 44 billion dollars) corresponds to indebtedness to the IMF. This debt is different from that owed to private creditors, due to the Fund’s privileged creditor status and the need to discuss economic policy with the IMF to access a programme. The interest rate paid to the Fund is close to 7% per annum by the end of 2024: this is a high level considering the Fund’s privileged creditor status and the conditionalities it imposes in its programmes.
The most important institutional modification to be made is a fiscal rule with sufficient consensus and credibility to provide predictability to fiscal policy: a well-designed rule can incorporate among its dimensions mechanisms to keep debt at sustainable levels. Another institution to build are the “stabilisation funds”, which accumulate surpluses in good times and deaccumulate in bad times or in exceptional situations such as natural disasters.
