Is an Uruguay-style, no-haircut debt restructuring feasible?

3rd October 2019

By Ignacio Portes

Is an Uruguay-style, no-haircut debt restructuring feasible?

Presidential favorite Alberto Fernández and his economic team have been trying to present a friendly face to the country’s bondholders, speaking of a mutually-agreed debt re-profiling with no haircuts on capital.

But a growing amount of actors are seeing the proposal as unrealistic, to say the least.

The latest to come out against it has been the International Monetary Fund. According to multiple reports, the Fund is favoring a “Ukraine-style” re-negotiation — with bondholders taking part of the hit in order to make repayment more sustainable — over Fernández’s Uruguay-like proposal, which merely kicks maturities a few years down the road.

</p> <h2><strong>Optimistic promises</strong></h2> <p>Last week, <a href="">Fernández had argued</a> that “the way out of our troubles could be to postpone our obligations, gain some time, with no cuts to what we owe. By doing that, our schedule of maturities can become flatter, giving us room to grow.”</p> <p>His words (and his comparison with Uruguay’s renegotiation in 2003) came during an event organized by the center-right Fundación Mediterránea think tank in Córdoba province, one of the few districts in which President Mauricio Macri remains strong.</p> <p>Fundación Mediterránea has advocated for a quick solution for debt holders, with no haircuts, and its leaders were full of praise for Fernández during the event, emphasizing the differences between the first few years of Kirchnerism in which Argentina had a fiscal and commercial surplus and the latest era in which numbers deteriorated.</p> <p>In another event this week, <a href="">Fernández’s economic advisor</a> Matías Kulfas <a href="">said</a> “Alberto’s mention of the Uruguayan case was aimed at making it clear that we want a voluntary, mutually-agreed extension of maturities.”</p> <h2><strong>The ‘Uruguayan’ scenario</strong></h2> <p>So how was that Uruguayan debt-renegotiation like?</p> <p>After suffering from a big spillover effect of Argentina’s 2001 financial crisis, Uruguay offered its debt holders a more generous treatment than its neighbor.</p> <p>By 2003, the holders of more than 90 percent of Uruguay’s debt had accepted a debt swap with no haircuts on capital or interest rates, but with an extension of maturities of around 5 years.</p> <p>This “friendlier” approach contrasted with that of Argentina, which under Néstor Kirchner’s presidency held much longer and tougher negotiations with debt holders, most of which ended up accepting capital reductions of more than 50 percent.</p> <p>According to <a href="">Alberto Steneri</a>, who oversaw Uruguay’s debt renegotiating process at the time, their approach was favored in order to maintain the country’s reputation of always paying back its debts. “That was worth more than what we could save by negotiating lower payments” with their creditors, Steneri told Argentine media on Monday.</p> <h2><strong>The cost of friendliness</strong></h2> <p>For that proposal to work, however, Uruguay had to make some big sacrifices, Steneri acknowledged.</p> <p>“We had big problems with our balance of payments and with our fiscal situation. We made some big adjustments that allowed us to reach a 3.2 percent primary budget surplus in 2003. And we used those figures as leverage to show creditors that our problem was one of liquidity and not of insolvency, and that a friendlier arrangement than a default was possible,” the former director of Uruguay’s public debt management unit argued.</p> <p>Uruguay’s primary surplus figures reached 4 percent in 2004, and came with a steep 50 percent devaluation of the currency in 2002 and a 10 tax on public and private salaries, according to a report from the LCG consultancy agency.</p> <p>“The way in which Uruguay quickly rebalanced its books made its proposal rapidly credible. It was seen as a country that suffered from an external shock but that still was credible in terms of repayment capacity. The market will not see things in the same light in our case. Argentina isn’t merely dealing with an issue of liquidity, it actually has a solvency problem,” CONICET economist Martín Trombetta told <em>The Essential</em>.</p> <p>Argentina’s devaluation was even bigger than Uruguay’s in 2002, with the peso losing two thirds of its value (and overshooting to -75% for some months), and salaries and public pensions left far behind inflation. But the size of Argentina’s crisis was also bigger than that of Uruguay, and the same could be said today, making the comparison with the neighboring country akin to wishful thinking.</p> <h2><strong>Growing skepticism</strong></h2> <p>Consensus about the unrealistic nature of a no-haircut proposal now seems to be growing. In a <a href="">story</a> published this week, Financial Times quoted multiple analysts saying the debt proposals seen so far belonged to “fantasy land” and needed a “high degree of payment relief” to make them sustainable.</p> <p>On Tuesday, pro-market consultant Carlos Melconian continued to push this position in a conference in Córdoba province, not far from when Fernández initially made the Uruguay analogy, saying “the issue of the debt has barely started. There is no ‘Uruguayan approach,’ Argentina will go to a haircut scenario.”</p> <p>According to Juan Pablo Vera, chief financial analyst at Tavelli, “the Uruguay-style solution will end up being a re-edition of (former economy minister Domingo) Cavallo’s mega-swap.” The 2001 mega-swap, or <em>megacanje</em> in Spanish, was also a friendly agreement with creditors done under emergency conditions, and is widely remembered as a failure.</p> <p>“It was a massive folly. It increased the country’s total debt and future disbursements in exchange for a bit of short-term relief. A story we’ve seen many times,” Vera argued.</p> <h2><strong>Building consensus</strong></h2> <p>Although Fernández’s team has not published any detailed economic program, Trombetta argued that what has been suggested so far does not seem feasible.</p> <p>Kulfas’ statements about looking to double the country’s exports in four years to obtain the dollars the country needs seemed unlikely and, according to Trombetta, that would only leave us with the option of “a big adjustment, either through nominal fiscal cuts or through a devaluation of the peso, but that is not what Fernández’s team is selling at the moment.”</p> <p>Trombetta acknowledged that “throughout Argentine history, the biggest successful adjustment programs have always been carried out under Peronist governments,” which he sees as more capable of generating the necessary social consensus to make them feasible. But that consensus, it seems, might need to include losses for bondholders.</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.