El Salvador’s Debt Cliff

In a political conflict reminiscent of the political battles over the debt ceiling in the United States, El Salvador is embroiled in a political battle that could end with the small Central American nation defaulting on its debt.

The government of President Salvador Sanchez Ceren and the main opposition party, ARENA, are at loggerheads over the issuance of US$1.2 billion in bonds. President Sanchez Ceren has said that the bonds are necessary to avoid a default on El Salvador’s existing debt.

President Sanchez Ceren and Mauricio Interiano, the leader of ARENA, met Friday and Monday to discuss several issues that are tied to the fiscal impasse, including pension reform and the passage of a fiscal responsibility law. However, both sides walked away without reaching an agreement.

On Tuesday, October 11, President Sanchez Ceren declared the issue to constitute an “emergency situation.” Lorena Pena, the President of the Assembly and a member of the FMLN, clarified that the declaration was not an executive order. Even still, the President’s declaration has been criticized by constitutional lawyers and the opposition ARENA party.

After the declaration, the GANA and PCN parties agreed to support the bond measure, reports El Salvador. Guillermo Gallegos, Vice-president of the Legislative Assembly, said his party agreed to support President Sanchez Ceren and the FMLN because “the country is at the point of failure.”

Even with the added support, the bond measure’s proponents do not control enough seats in the legislature to pass the bill. The bond measure must pass the Legislative Assembly with a “qualified majority,” that is three-fourths of the votes. Currently, ARENA party members control 35 of the 86 seats.

Communications Secretary Eugenio Chicas indicated that December is the deadline for the two sides to reach a deal, reports La Prensa Grafica. While this gives both sides more than a month to reach an agreement, the uncertainty surrounding the issue will hurt the Salvadoran economy.

One need only to look at Argentina to see what a default on debt obligations can do to an economy and how long its effects can last.

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