Is Buenos Aires province on the brink of default?

16th January 2020

By Ignacio Portes

Is Buenos Aires province on the brink of default?

A mere four months after Argentina’s federal administration incurred in a partial default of its debt, Buenos Aires province could be on the verge of following on its footsteps.

The province is due an installment of USD 277 million dollars of its BP21 bond by January 26, but according to Governor Axel Kicillof, it is not capable of meeting such payment at the time. Instead, the province announced it will deposit USD 27 million corresponding to interest payments, and proposed kicking the remaining USD 250 million three months down the road, meaning that 75 percent of bondholders will have to accept his proposal before the deadline for a technical default to be avoided.

</p> <p>According to Kicillof, the national government’s renegotiation of its own federal debt will be clearer before the BP21&#8217;s new proposed date of maturity, May 1. The province wants to go down a similar route than the federal administration, renegotiating all its debt in the coming months in order to gain some financial breathing room over the next few years.</p> <p>But although Argentina has defaulted on some of its <a href="">short-term local debt</a>, it has not defaulted on the bonds trading abroad. Alberto Fernández’s Economy Minister Martín Guzmán said he would continue to pay those foreign debts while restructuring negotiations are ongoing, thus avoiding such an event. If an agreement between Buenos Aires province and bondholders is not reached in the next few days, the country’s biggest province could end up defaulting abroad first.</p> <p>According to the bonds’ <a href="">prospectus</a>, “any modification in the terms of the bonds can take place (…) with the vote of (…) the holders of 75 percent or more of the total circulating capital of one series of bonds affected by the proposed modification”.</p> <p>“We have the will to pay, just not the capacity. We are acting in good faith,” Kicillof said in a press conference on January 14, in which he blasted his predecessor María Eugenia Vidal for doubling the amount of maturities the province faces throughout his term, more than USD 8 billion over the next four years.</p> <h2><strong>Provincial debt troubles</strong></h2> <p>After Argentina settled its conflict with holdout bondholders in 2016 and returned to international debt markets with a few <a href="">historically large</a> dollar-denominated bond issuances, many provinces followed suit selling their own bonds as well.</p> <p>Argentine provinces had some ominous history with dollar-denominated debts, which helped trigger the country’s 2001 financial crisis, when <a href="">more than half</a> of the money they owed was denominated in a foreign currency as the country’s 1-to-1 peso to the dollar peg was looking more and more likely to break. But Argentina had become a hot market again for debt issuances by 2016, and governors took the opportunity to raise fresh funds for themselves.</p> <p>According to a recent report by the Elypsis consultancy agency, almost all provinces raised their debts significantly since 2015, with few exceptions like Santa Cruz and Formosa. Buenos Aires province debt jumped from 53 to 84 percent of it GDP between 2015 and 2018, making in the second most indebted province in the country.</p> <img class="wp-image-6853 aligncenter" src="" alt="Provincial debts according to Elypsis" width="652" height="339" srcset=" 300w, 600w, 637w" sizes="(max-width: 652px) 100vw, 652px" /> <p>The situation was only made worse last September, when Argentina’s default of its dollar-denominated short-term Lete notes <a href="">hit Buenos Aires directly</a>, as the province held a significant part of its savings in those bonds, whose maturities have already been unilaterally extended twice, first by Mauricio Macri’s administration and then by Alberto Fernández.</p> <p>Elypsis puts Chubut and Jujuy next to BA province as those with the biggest debts (with 2019 still to be fully processed), and indeed those two local administrations have also been struggling financially as of late. Chubut’s Governor Mariano Arcioni has faced months-long conflicts with unions and state workers over lack of payments, while Jujuy’s Gerardo Morales has been heavily dependent on aid from the national administration during Macri and Fernández’s terms.</p> <h2><strong>Is contagion possible?</strong></h2> <p>According to a report from Mariva Bank, the probability of contagion to other provinces in the short term is not as big, as they “do not face large FX principal bond payments in 2020”. Second to Buenos Aires province is Buenos Aires city, which would need to rollover only one payment of USD 165 million on February 19. The city is known for avoiding default even during the 2001 financial crisis, and its debt is still seen as sustainable in the market, so financing should not be a problem there.</p> <p>But market doubts remain with regard to other districts. Chaco and Tierra del Fuego’s announcements earlier this week that they would service their coming maturities brought some relief to bondholders’ worries.</p> <p>The role of the national administration will be important here. Although Guzmán clarified earlier this week that it would <a href="">not assist BA province</a> financially to pay its maturities, the Treasury can still indirectly help local governments through some discretionary use of the tax revenue that has to be shared with the provinces by law. Indeed, Chaco got an advance on its payments from the nation last week, just as it faces some big bond maturities over the next few weeks.</p> <p>Fernández has also frozen an agreement that governors had signed with the previous national administration that forced them to lower provincial taxes, while many governors are also looking for additional sources of revenue through <a href="">new or higher levies</a> in their provinces.</p> <h2><strong>Will a deal be reached?</strong></h2> <p>For now, however, all eyes will be on Buenos Aires province. Was the new May 1 date that Kicillof proposed in public discussed in advance behind the scenes with BP21 bondholders? Or is Kicillof willing to risk that they might not accept his proposal, thus triggering a technical default?</p> <p>One thing we know is that the list of BP21 bondholders is large and complex, so a deal would need discussions with dozens of parties. According to <a href="">Bloomberg data</a>, Fidelity Investments is the largest known holder with 16.3 percent of the issue in its portfolio, followed by the Dutch NN Investment Partners with 3.52 percent. Big names such as JP Morgan, Allianz, Prudential, Blackrock and the Royal Bank of Canada are also on the list, as well as some Argentine firms.</p> <p>There is a direct precedent of Kicillof heading a big negotiation with powerful bondholders that eventually led to Argentina being declared in technical default by some agencies. The precedent is none other than the world-famous 2014 deadline given by a New York court to Argentina to pay a group of holdout bondholders led by Paul Singer’s Elliott Management.</p> <p>New York Judge Thomas Griesa ruled that banks should refuse to process Argentine payments to the 93 percent of bondholders who had accepted Argentina’s debt restructuring until the remaining 7 percent who didn’t were paid in full. Kicillof, who was the country’s Economy Minister at the time, did not reach an agreement with Elliott before Griesa’s deadline, and Argentina’s payments were frozen at the Bank of New York Mellon, leading the International Swaps and Derivatives Association (ISDA) to <a href="">trigger</a> the payment of the country’s credit default swaps.</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.