Investors start to ponder debt re-negotiation scenarios

22nd August 2019

By Fermín Koop

Investors start to ponder debt re-negotiation scenarios

The economic uncertainties following the surprising results in Argentina’s primary elections led to presidential hopefuls, lead investors and analysts to start seriously considering the possibility of the country renegotiating its debt with private bond holders under a new administration.

The funds granted by the International Monetary Fund (IMF) are enough to cover 54 percent of the country’s financial needs this year, reducing the need to refinance the dollar-denominated notes known as Letes, while not needing to issue new domestic or international bonds either.

That scenario changes drastically in 2020. The government’s financial program assumed that Argentina will re-gain access to debt markets to roll over its coming debt maturities, helped by favorable conditions that would include affordable interest rates. But those conditions are far from what was initially expected by the Macri administration.

</p> <p>The JP Morgan EMBI+ Argentina index, also known as “country risk,” which measures the spread paid by Argentine bonds compared with a US benchmark, reached 1.900 basic points this week, showing the market has big doubts on Argentina’s capabilities to pay its debt in a timely manner.</p> <p>Since the doubling of the country risk index seen last week, after the win of a candidate seen as less likely to cut primary spending, investors finally started to openly discuss what had so far been only <a href="">whispered</a>: the possibility of a debt restructuring.</p> <p>“Argentina is covered in the short-term, but the large amount of debt taken during the Macri administration created significant commitments for the country,” Leandro Mora Alfonsín, economist and debt expert, said. “Starting in 2020, the government should renegotiate interest rate and payment deadlines.”</p> <h2><strong>Scrambling for dollars</strong></h2> <p>Argentina will face debt maturities of more than US$180 billion during the next four years, according to a recent report by UNDAV University. Looking at each year, the amount reaches US$46.6 billion in 2020, US$44.9 billion in 2021, US$46.4 in 2022 and US$37.8 billion in 2023 – the final year of the new administration.</p> <p>This includes the maturities with regards to private creditors as well to those contracted with the IMF after the record loan of US$56 billion, which the country will need to start paying back in 2021.</p> <p>The drop in demand for Argentina’s piling obligations already has the administration scrambling to administrate the scarce dollars it owns to satisfy its creditors’ demands.</p> <p>This week, a group of banks that had lent US$2.6 billion to Macri’s administration as part of a repurchase agreement (Repo) asked for its money back, as the assets that the country had put up as collateral plunged in value.</p> <p>According to reports by <em>Infobae</em> and <em>El Cronista</em>, <strong>Santander, HSBC, BBVA, Nomura, Citi and Credit Suisse</strong> returned the Bonar 2024, Bonar 2025 and Bonar 2037 they were holding in custody back to the sovereign, for a total of almost US$ 13 billion. The country also gave US$2.6 billion back to the banks.</p> <p>This did not technically count as a drop in public debt, however, as the bonds were never owned by the banks, just held as collateral. Yet the Central Bank was counting those dollars as part of its reserves, which dropped by US$3 billion this week.</p> <h2><strong>Trying not to default</strong></h2> <p>“Markets are nervous about Argentina’s public debt, which has grown quite significantly and will be very hard to pay,” Mariano Kestelboim, UBA economist, said. “The new administration will have to sit down with private creditors to give oxygen to the country’s current account.”</p> <p>While Argentina is generating fresh dollars through improved <a href="">foreign commerce</a> figures, those profits would not be sufficient to compensate for financial outflows if maturities can’t be rolled over.</p> <p>Presidential hopeful Alberto Fernández, who took the lead at the PASO primaries, has repeatedly rejected the possibility of the country not paying its debts, but opened the door to a negotiation with creditors, something that has so far been dismissed by the Macri administration.</p> <p>Martín Guzmán, an Argentina economist working with Nobel laurate Joseph Stiglitz and who has advised Fernández, said this week that Argentina should carry out a “debt rebalancing” process with private creditors. This means, Guzmán said, to renegotiate interests and deadlines directly with creditors instead of doing it with the market. “Everybody wants to avoid a default, including creditors,” he said.</p> <h2><strong>Ukraine as a model?</strong></h2> <p>A debt restructuring implies an agreement between the country and the creditors to alleviate the debt payment in the short term, while guaranteeing payment under new terms. Negotiations can sometimes include a reduction in capital or interest, or at the very least new deadlines.</p> <p>Back in 2001, Argentina unilaterally defaulted on its debt with private creditors, amid a social, economic and political crisis. Most of that debt was restructured under Néstor Kirchner’s presidency in 2005 and 2010, with the country offering new bonds tied to GDP growth, inflation and other variables in exchange for the old, defaulted paper, with capital haircuts included.</p> <p>Lately, investors and analysts have suggested that Argentina could follow the example of Ukraine in its recent debt restructuring process, in which the IMF took part as a mediator to ensure a less traumatic process.</p> <p>The IMF gave Ukraine in 2015 a US$17.5 billion loan as part of a Stand-By Agreement, the same one it now has with Argentina. But the country faced difficulties and couldn’t pay back the loan, so the Fund agreed to change the deal, with the condition that the country’s private creditors should also accept entering into a debt renegotiation.</p> <p>Ukraine and the IMF worked together for four months to convince creditors that accepting the negotiation was the best path forward in order to avoid default. In exchange for reducing the debt by 20 percent and delaying payments four years, they offered a higher interest rate, up from 7.2 to 7.75 percent.</p> <p>The experience was seen as positive by experts, as most of the creditors accepted the debt restructuring – Russia being the sole exception. Ukraine’s country risk went down after the agreement, breaking the 1,000 basis points barrier in late 2015, while the country also posted modest growth figures for three years straight.</p> <p>“It’s too soon to say which will be the best way to go for Argentina but the path taken by Ukraine is an interesting example,” Mora Alfonsín said. “The two main parties competing in the elections have said they are committed to paying their debts. But Fernández has shown intent of carrying out a renegotiation.”</p> <p>But reaching Ukraine&#8217;s results could prove much harder than for the Eastern European nation. &#8220;There is a lot of talk these days about a Ukraine-style restructuring. Those results, however, were reached quickly back then because Ukraine&#8217;s debt was concentrated in a few hands (in fact, only four big funds took part in the negotiation). Here, we have thousands of bondholders, many of whom have already undergone haircuts in 2005 and 2010,&#8221; Gabriel Rubinstein, a former executive director at the Buenos Aires stock exchange, said in a more pessimistic <a href="">analysis</a> yesterday.</p> <p>

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Fermín Koop

Fermín Koop is an economic and environmental journalist from Buenos Aires. He is editor at Diálogo Chino and co-founder of Claves 21.