How the Default in Argentina Will Affect the Countries of the Region?

The crisis that the southern government is experiencing with the IMF should not be seen as a problem that only interests that country. The non-payment of the debt or default of Argentina can cause damage to Latin America

View of La Casa Rosada in Argentina

Photo: Pixabay

LatinAmerican Post | Christopher Ramírez

Argentina is once again in the eye of the hurricane after knowing that, in case of not reaching an agreement to readjust the debt that it has With the International Monetary Fund (requested by former President Mauricio Macri in 2018), its government would enter a default process. This means that it will not be able to pay its international debts.

In other words, in the hypothetical case that Argentina does not comply with the quota that it must pay to the IMF in March, the national government would fall into a default that would bring serious consequences, both for the nation and for its immediate neighbors and commercial partners.

This debt is not like that acquired by any natural person. International justice cannot make Argentina, in case of default, replace its debt with the IMF for more than 45 billion dollars, with the delivery of, for example, a public building. The fact that its government does not comply with the agreement will make the country become, as the Financial Times mentioned in one of its articles, "an international financial pariah."

Thus, although there are no guarantees to be able to cover the capital owed to the IMF, nor its interests, what would happen immediately is that Argentina would be cut off from the international economy. In short, the national government will lose all access to the so-called “debt markets”, which is why, according to Abascal, “it can no longer be financed with bond issues abroad […] in a situation of default, the economy closes and depends completely on itself ”. All this, in a context of economic reactivation.

Without money, there are no imports

Thus, what begins as a national crisis, becomes an international one that ends up affecting the countries of the region, especially neighbors such as Brazil, Uruguay, and, to a lesser extent, Chile.

It should be noted that with the delivery of 1,900 million dollars to the IMF corresponding to the December quota, the Central Bank of Argentina was left with a total of 39,153 million dollars in gross international reserves, that is, what it can use to pay the debt with its international creditors.

So, if the dreaded default arrives, the Central Bank will be able to make use of its own money to support public expenditures within the country, which, of course, would reduce imports there to a maximum level. The money must be used for the essentials, and many of the imports, in times of crisis, simply are not; A situation that does not sound pleasant at all in the awnings of the Government of Brazil, one of the countries from which Argentina makes the most purchases.

“Argentine exports to Brazil expanded 102.6% year-on-year in May (2021), adding USD 810 million, the fifth consecutive increase, while imports from that destination were USD 1,281 million and showed an increase of 185, 7% compared to May 2020 ”, reported the Argentine Chamber of Commerce based on data from the Ministry of the Economy of Brazil.

This means that the reduction of purchases by Argentina would put the Brazilian economy in check, since the southern country is considered the third most important recipient of its exports, only behind China and the United States.

Also read: The most devalued currencies in Latin America in 2021

Also, without the products that Argentina imports from Brazil (hydrocarbons and accessories for motor vehicles, mainly), it will not be able to fully comply with the orders that its northern neighbor requests (products such as unmilled wheat and rye and tourism and freight vehicles that, of course, they are assembled with the pieces supplied by the Brazilians). In short, it would be affecting not only the negotiation of imports and exports between the two countries but also their industrial process.

Higher inflation, less spending.

Another of the consequences that the default would have is the depreciation of the Argentine peso, in addition to the increase in inflation (which by November 2021 reached 41.8%, according to the National Institute of Statistics and Censuses -Indec-) derived from this situation and the possible generation of money by the Central Bank.

This, according to the Economic Research Center (Cinve), would be a real headache for a country like Uruguay in the summer season 2021-2022. that would see the increase in the prices of entry and exit to Argentina, as well as the devalued peso, people would not see it viable to leave the country to take their vacations if the money is enough to enjoy one.

Lower value in the stock market.

On the other hand, although to a lesser extent, Chile could also be affected, especially companies of Chilean origin based in Argentina. Business groups such as Cencosud or Falabella would see their shares and income fall in price just as the Argentine peso does.

Thus, commercial sectors such as tourism, entrepreneurship, and international business would be affected in the region, with the neighboring countries of Argentina (except for Bolivia, which has some guarantees in the event of not receiving payment for the gas it exports to that country. ) as the main victims of the possible default that could occur in March.