Nobel Prize winner Joseph Stiglitz warned that the case of Argentina's debt may be a "harbinger" of what will happen to other indebted countries. In an article published Wednesday by The Boston Globe, the economist questioned creditors' attitude towards using Argentina as an example to dissuade the rest of the emerging countries from imitating it and defaulting on their payments.

"In the context of the pandemic, it is both short-sighted and inhumane for creditors to play the usual games in which they try to pry as much as they can from hapless debtors," Stiglitz said, "Ironically, the big bond funds are among the biggest holders of emerging-market debt and stand to lose the most," he added. The article is no coincidence. It comes at a time when cracks are opening within the major creditor firms between those who believe they have the most to lose if they let Argentina's Finance Minister Martín Guzmán get away with paying less than 50 cents on the dollar, or if, this time, they lose more if they don't cooperate with the country, go for "all or nothing" and are left with "nothing" not only from Argentina but from all the other emerging countries that the coronavirus crisis left on the verge of insolvency.

Ironically, the big bond funds are among the biggest holders of emerging-market debt and stand to lose the most, Stiglitz warned creditors

In the Argentine government, as LPO anticipated, they read it as a Version 2.0 of an old paradox of Game Theory. In the "Chain Store Paradox" of the 1970s, a monopolistic chain of stores in a number of cities had to decide whether to let a competitor open in one of those locations (cooperate) and share part of the profits with the competition; or whether to be willing to aggressively lower its prices and lose profits in the short term so that that competitor would not see any possible profit margin and would have to close down. In itself, a competitor would not even scratch the surface, but if competitors appeared in every city, that was another story. The argument among those who are still asking to be tougher on Argentina - and therefore would reject Guzmán's new offer - is essentially that. "If we let Argentina pay us half, Zambia, Lebanon and Brazil will follow, and who knows how many more with the same intentions".

Kirchner to the rescue: The Vice President's intervention helped unlock Argentina's debt negotiations days before going into default Guzman's team believes that this argument is a gross misdiagnosis and seeks to install another reading among the bondholders (not just the largest creditors). In a world of zero rates like the one that opened after the Subprime crisis, in the last 12 years the emerging markets were "the goose that lays the golden eggs" for funds like BlackRock or Fidelity. With the Covid-19, zero rates in Europe and the United States will continue. For the Ministry of Economy and for Stiglitz, bondholders should be concerned about the survival of the debt business of emerging countries, or if, by playing hard to get, they all end up sooner or later going into default and thus wiping out their business of the last decade.

Argentina's Finance Minister Martín Guzmán (left) and Joseph Stiglitz. 

In this sense, Stiglitz, who is Martin Guzman's mentor, said: "The forecast is that many other countries, including the republic of Congo, Zambia, and possibly El Salvador, Iraq, Sri Lanka, and Brazil will not be able to pay what's owed as the coronavirus pandemic translates into a coronavirus economic crisis: Money is rushing out of the countries, exports are collapsing, and commodity prices are plummeting. That's why how things play out for Argentina may be so consequential. It's a harbinger for other countries in debt". For Stiglitz, "If reports about the revised offer they made last week are correct, they were still demanding close to 100 percent of what is owed". Therefore, "Argentina is right to reject unsustainable restructuring. And the creditors are wrong to try to strike the fear of God - or at least of default -into Argentina's heart to make the nation an example to all debtor countries in trouble because of COVID-19. It's an unsavory ploy to induce nations to fall in line and agree to whatever harsh terms creditors demand".

Neither one nor the other: a political struggle

The market does not share Stiglitz's assessment and the sharp fall in country risk from 4000 basis points to less than 2700 basis notes that in reality the funds do not take a hard line, but in any case do not accept anything that is unacceptable to their clients. The counterproposals submitted by the three groups of creditors last week were between 59 and 63 cents. And it was a push to get the approach below 60 cents.

For Gabriel Caamaño, chief economist of the consulting firm Ledesma, framing the debate in these terms is a political issue. "If the funds wanted to punish Argentina, they would not have moved away from the pretense of 70 cents net present value of the debt per dollar, and that is not the case. They have already given up enough. In fact, today it is already clear that there is a possible agreement on 50 to 55 cents. The government can restructure its offer. We made a simulation by changing a little the conditions of Guzmán's proposal to reach that value, and it is feasible to reach 52 or 53 cents on the dollar without violating any of the principles of the debt sustainability analysis".

Argentina's Finance Minister confirmed that the dialogue with the bondholders is improving: "Things are going the way we want them to go"

"With this type of proposal, the main objective of restructuring the debt is achieved, namely to reduce interest and gain oxygen in the short term. So, I would say that I find it hard to understand why we keep turning the issue around and do not close in those conditions -within what has been feasible for Argentina and acceptable for the bondholders since the beginning-. It seems to me that the Government is looking for something better and to come out as the winners, as the ones who set a precedent. This issue could already be heading towards an agreement. The only reasons why I think we are still thinking about this issue is political, not economical," he added.

In addition, according to the specialist, Stiglitz's analysis assumes that all emerging countries are in a global liquidity crisis that makes default imminent, and not that only those with previous problems, such as Argentina, are defaulting. "The rest of the emerging countries are having greater liquidity needs and are not having difficulties in financing themselves because central banks are injecting liquidity. In any case, the risk of widespread default will come later when liquidity conditions begin to reverse. The challenge will be to return relatively quickly to fiscal equilibrium or to the financial needs that existed before the coronavirus, in other words, not to generate persistent fiscal imbalances that will later become unfeasible," Caamaño concluded.