Argentina launches USD 100 billion debt renegotiation

29th August 2019

By Ignacio Portes

Argentina launches USD 100 billion debt renegotiation

It’s official.

Argentina will have to restructure its debt, Economy Minister Hernán Lacunza announced yesterday, unveiling a plan to postpone and re-negotiate payments for more than US$100 billion dollars with local, global and institutional creditors.

The news came as the relentless selling pressure put Argentine assets at new lows, and the Treasury failed to roll over its latest tranche of short-term, dollar-denominated Lete notes. The auction was declared empty, only two weeks after the past bond sale only reached 5 percent of the needed renewals.

</p> <p>Lacunza argued that the decision was taken in order to comply with President Mauricio Macri’s mandate of preserving the value of the peso. The Central Bank had been struggling over the last few days to keep the Argentine currency from reaching a new low, auctioning its dollar reserves in increasing amounts in currency exchange markets.</p> <p>On Tuesday and Wednesday, the Central Bank made six auctions per day, some of them offering up to USD 150 million, to compensate for the meager amount of private dollar sellers. As Argentina struggles with a finite amount of hard currency to make up for a staggering sum of liabilities, the government opted to kick short-term debt payments some months down the road, while it also took the opportunity to send a bill to Congress to re-negotiate long-term debt as well.</p> <h2><strong>The basics of the restructuring</strong></h2> <p>Lacunza’s announcement had four basic points:</p> <p>1) Approximately USD 7 billion in short-term local maturities, including Letes, Lecaps and other Treasury notes, will be delayed by 90 to 180 days. Not every holder of these notes will be affected by the decision, as the government decided to exclude individual owners by paying them fully and in cash, while freezing most of the payments to institutional investors, which hold the vast majority of these notes.</p> <p>2) In addition, a bill will be sent to Congress for all parties to discuss a “voluntary reprofiling” of dollars held in longer-term bonds under Argentine jurisdiction. The goal, according to Lacunza, is to extend maturities without cuts to either capital or interests.</p> <p>3) The government will also aim at “re-profiling” debt issued under foreign law. Between home and foreign bondholders, the restructuring will amount to roughly USD 50 billion. Negotiation for the bonds outside Argentine jurisdiction is likely to happen directly between the Argentine government and the bondholders, with a close look at the clauses in each bonds’ prospectus. In some cases, 75 percent of the holders of one series of bonds will need to agree to the re-profiling for it to succeed.</p> <p>4) Finally, the <a href="">much-anticipated re-negotiation of the IMF debt</a> will be launched under Macri’s administration, although Lacunza said this would in all likelihood extend into the next presidential period. The IMF agreed to a loan of more than 50 billion dollars with the country, of which 44 billion have already been disbursed.</p> <h2><strong>Firms’ cashflow at risk</strong></h2> <p>Each of the announcements left a lot of questions unanswered, leading to a long night of uncertainty among financial decision-makers.</p> <p>The 90 to 180-day postponement of short-term maturities sent a multitude of business people into shock, as many of them invest their cash flows in institutional funds with short-term maturities to shield their income against inflation until the time to pay their bills arrives.</p> <p>One example was Claudio Belocopitt, the owner of the Swiss Medical insurance firm. The business leader took to the airwaves of the A24 network, which he also partially owns, immediately after Lacunza’s press conference.</p> <p>“I hope they re-think about what they have just done. We are undergoing a dramatic situation. We can&#8217;t put out a fire with more fuel. I would ask the Economy minister if he has ever had to pay salaries. If this gets added on top of the crisis we were already suffering, then I don&#8217;t know how firms are going to cope with this situation. If this is simply a mistake, it is an incredibly dangerous one, as it hurt an already wounded chain of payments even harder,” Belocopitt said.</p> <p>Amid the panic, companies decided to freeze withdrawals from investment funds holding those types of short-term notes, although the government was promising that the situation could be quickly normalized.</p> <p>Earlier today, the CNV securities regulator said that the exception for individual holders of these short-term Lete, Lecap, Lecer and Lelink notes would also apply for individuals invested in funds that hold them within their portfolios. But nothing was said of institutions, which stand for the majority of the cash held in these instruments. This could cause complaints paralleling those of Belocopitt to spread in the coming days.</p> <h2><strong>Congress to re-open?</strong></h2> <p>As for the medium-term bonds issued under local law, the government has kicked the ball back to the opposition by saying it’s up to the Congress to discuss concrete terms for re-negotiation.</p> <p>Opposition lawmakers’ general tone yesterday was that of skepticism, waiting for further details on the bill before deciding on their response.</p> <p>“Now that their hair is on fire they are calling us in Congress,” Frente de Todos’ leading lawmaker Agustín Rossi told <a href="">FM La Patriada</a> yesterday. “But when we said that the agreement with the IMF had to be discussed in both chambers, they denied us the possibility. We have very little information and I think the bill has not been written yet, so we are going to take things step by step and study how the maturities are structured,” Rossi added.</p> <p>The centrist Marco Lavagna, son of <a href="">presidential hopeful Roberto</a>, who came third in the primaries, said meanwhile that “we won’t sign a blank check for the government to give it to bondholders.”</p> <p>Negotiations between the government and the opposition on this issue will likely re-ignite the crossfire seen over the last few weeks, in which both sides said the other was torpedoing the country’s long-term interests for short-term political gains.</p> <h2><strong>Bonds under foreign law</strong></h2> <p>The third point in Lacunza’s re-negotiation program will have a different dynamic, as here bonds fall under foreign jurisdiction.</p> <p>“We will initiate a re-profiling of bonds under foreign law under collective action clauses, with the goal of extending maturities with no cuts to capital or interests, in order to achieve a less demanding payment schedule for the 2020-23 period,” a communiqué from the Economy Ministry said.</p> <p>In his press conference, Lacunza argued that this was done with the aim of facilitating the work for the coming administration, trying to ease tensions between Macri and his likely successor Alberto Fernández.</p> <p>The aforementioned collective action clauses, or CACs, are a legal tool that some Argentine bonds lacked in previous debt re-negotiations, which serve to stop a hostile minority from blocking the agreement in order to get better terms or punitive payments for the infringements.</p> <p>This is what led to the internationally famous decade-long conflict between Argentina and Paul Singer’s Elliot Management fund, which bought defaulted Argentine bonds on the cheap during the 2001-2002 crisis and had the financial strength to hold on for full payment plus interest and additional retributions while suing the country in multiple jurisdictions across the globe, a situation that Argentina did not want to relive.</p> <h2><strong>The IMF</strong></h2> <p>As for the final point of the announcement, the IMF issued a supportive press release shortly after Lacunza spoke.</p> <p>&#8220;The Fund is in the process of analyzing (yesterday&#8217;s) announcements and evaluate their impact. Our staff understands that these important steps were taken to deal with liquidity needs and protect Central Bank reserves,” the communiqué said.</p> <p>According to reports from <a href="">Ámbito Financiero</a>, it was the Fund itself that pushed for the re-structuring with private bondholders, as it worried debt was getting close to “unsustainable.” If that were the case, then the disbursement of USD 5 billion expected after September’s review of the country’s finances would be at risk, increasing the pressure on an already stressed Argentine financial system.</p> <p>Argentina is by far the Fund’s <a href="">largest debtor</a>, so it is in both parties’ interest to reach an orderly solution to the conflict, with other re-negotiations in which the IMF acted as mediator, such as that of <a href="">Ukraine</a>, as a potential model.</p> <p>In addition to the USD 5 billion disbursement that Argentina is hoping for, the re-payment of the USD 50 billion Standy By Agreement loan will also need to be restructured, as Argentina is unlikely to find the cash to start re-paying in the next presidential period.</p> <h2><strong>The new picture</strong></h2> <p>The word on Casa Rosada yesterday was that the restructuring move will free up an additional <a href="">9 billion dollars</a> to stop a run against the peso during the last few weeks of Macri&#8217;s term.</p> <p>The government fears that if the peso-to-the-dollar exchange rate goes higher, with inflation likely to quickly follow suit, the political situation might become untenable. But this is likely to prompt a response from the opposition, which has repeatedly said that foreign reserves should be protected as a key state asset and not &#8220;burnt&#8221; on the cheap to protect the government in its last days in charge, while leaving the next administration with no firepower left to stop the peso from completely collapsing.</p> <p>Today, the Central Bank had to raise interest rates again, now above 75 percent, but this was still not enough to tempt banks into renewing their 7-day Leliq notes. Instead, banks will receive pesos, which might add fuel to the fire if they are used by the public to buy more dollars.</p> <p>In addition to the already-existing problems, Argentina will now likely have to fight credit agencies looking into whether to consider this event a default, as well as dealing with potential bankruptcies and payment delays due to the rippling effects of the decision.</p> <p>The country&#8217;s financial crisis is only starting to develop.</p> <p>

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Ignacio Portes

Ignacio Portes is The Essential's General Editor. Former Economy editor at the Buenos Aires Herald, he has also written for publications such as Naked Capitalism, NSFWCorp and Revista Debate.