Emerging markets fear ‘Roaring Twenties’

Emerging markets fear ‘Roaring Twenties’

As Argentina’s debt restructuring talks enter their eleventh hour, there is a growing expectation that today’s deadline will be extended. The government and its creditors are inching towards a deal to reprofile roughly US$65 billion in sovereign debt that the country cannot afford to repay.

President Fernandez’s government is currently amending an earlier offer it made in April. The new proposal will likely offer slightly higher interest and principal payments, as well as a shorter repayment ‘holiday’. For their part, creditors have adopted a less aggressive stance in recent weeks. Indeed, the price of Argentina’s international bonds (which are in default) have risen since the start of June.

Admittedly, the government has recently ceded ground in negotiations. However, the new terms could still save Argentina approximately $36bn in cash repayments up to the year 2029. In return, the government would be expected to run primary balance (or non-interest) surpluses for the foreseeable future.

Simply put, any deal would be conditional on Argentina securing the twin goals of fiscal rectitude and sustained economic growth. However, Covid-19 has exacerbated Argentina’s long-standing macro-financial problems, especially as the recession (and subsequent recovery) will be more protracted than initially expected. Even if a deal does get over the line, therefore, another painful debt restructuring may be required within a few years.


The economic shock triggered by Covid-19 could create a maelstrom for other debt distressed emerging markets (EMs), whose already threadbare public finances have been eroded by low commodity prices, subdued tourism receipts and reduced remittance inflows. Indeed, a record number of EM dollar bonds are trading at distressed levels – though mostly for smaller EM governments.

While the risk of near-term default for large EMs such as Brazil and South Africa remains unlikely, many economists are anticipating a wave of sovereign defaults over the next two years, especially in poverty-stricken sub-Saharan Africa. As such, the outcome of Argentina’s pending deal will set a precedent for other debt-laden nations. “It’s [Argentina] a harbinger for other countries in debt”, wrote Nobel-prize winner Joseph Stiglitz last month.

In January this year, before the coronavirus wreaked havoc on the global economy, IMF head Kristalina Georgieva warned that disturbing financial trends observed during the “roaring 1920s” – which ultimately culminated in the Great Depression – were playing out across parts of the global economy. For scores of thinly armoured distressed countries, it seems increasingly likely they won’t have to wait long to experience the devastating impacts of economic depression.