Economy

Argentina defaults (again) on part of its local debt

13th February 2020

By Ignacio Portes

Argentina defaults (again) on part of its local debt

It’s a headline that could have been written many times over the last decades, and it might not even be the last time we see it this year: Argentina has once again defaulted on its debt.

Although the larger renegotiation of international debt remains unaffected, with Argentina expected to present its offer on the second week of March and a deadline for bondholders to accept or reject the country’s proposal by the end of that month, Alberto Fernández’s administration ended up defaulting on its local law AF20 bond this week after multiple plans to re-finance it failed.

</p> <h2><strong>Failed swaps</strong></h2> <p>The government first tried offering to swap its AF20 bond, whose maturity this week was equivalent to roughly USD 1.5 billion, for other peso-denominated instruments. Argentina offered a range of new bonds in exchange, some tied to interest rates, others to inflation indexes and to Argentina’s peso-to-the-dollar exchange rate. But barely <a href="https://www.cronista.com/economiapolitica/El-canje-del-Bono-Dual-AF20-solo-consiguio-us-164-millones-un-10-del-vencimiento-20200204-0035.html">10 percent</a> of bondholders accepted the proposal, which included haircuts ranging from 7 to 40 percent, in addition to kicking the pay date down the road.</p> <p>After the failed swap attempt last week, Economy Minister Martín Guzmán took his last shot last Monday, with a new auction of peso-denominated bonds whose proceeds would have been used to pay the remaining 90 percent who didn’t accept the first offer. But this time the results were even worse, as Guzmán ended up <a href="https://www.clarin.com/economia/licitacion-bono-dual-declarada-desierta_0_Lpps2zSj.html">selling none</a> of the bonds on offer.</p> <p>The government was now cornered, with only two options left: printing money to pay the bonds or defaulting. Being mindful of the fuel that more money printing might add to the flames of inflation, the government opted for the latter option, prompting the first default in Alberto Fernández’s administration barely two months after taking office.</p> <h2><strong>Lacunza and Guzmán, closer than they seem</strong></h2> <p>Although many shots were fired on the campaign trail between the two main presidential candidates, Guzmán’s decision ended up proving not that different to that of Mauricio Macri’s last Economy minister, Hernán Lacunza.</p> <p>Faced with a similar conundrum last year, Lacunza opted for <a href="https://gettheessential.com/economy/2019/09/12/the-consequences-of-argentinas-selective-default-provinces-business-lecap-lecer-lelink-letes-leliqs-plan-bonex">unilaterally postponing payments</a> of its short-term Lecap, Lelink, Lecer and Lete notes after failing to find new creditors to rollover their maturities. Lacunza’s decision created significant turmoil in Argentina’s micro-economy, as many local firms had their short-term working capital invested in those notes. But despite knowing there would be consequences, the then minister considered it was more important to prevent a new run against the peso after investors used the money to buy hard currency.</p> <p>Here, similar considerations seem to have been at play. “We have fiscal discipline and we are not going to print money like crazy, least of all to pay the bondholders,” Fernández said last week, after the initial swap for the AF20 bonds failed.</p> <p>In that sense, Fernández’s decision worked, at least in the short term: the blue-chip swap exchange rate (which floats more freely than the official rate, where the Central Bank often intervenes), dropped from around 85 pesos to the dollar to 82.50 in the two days following the default. Investors had been speculating about an inevitable new round of money printing to pay on time, but the peso eventually regained value when that scenario did not materialize in the end.</p> <p>One difference between Lacunza’s default last year and Guzmán’s default last week is that Guzmán’s AF20 bond was mostly held by foreign investors, meaning that the current default will not cause the same disruptions due to a sudden liquidity crunch in Argentine companies when compared to last year’s default.</p> <h2><strong>Tough language</strong></h2> <p>Another difference between Guzmán and Lacunza’s defaults was the language employed by Guzmán in his press release to announce the decision.</p> <p>Macri’s administration made a point of its non-confrontational approach to creditors, while Alberto Fernández has been more mixed on that front. This time, the government took the offensive:</p> <p>“This government will not accept that Argentine society is used as a hostage of international financial markets, and will not place speculation above the wellbeing of its people,” the communiqué said in its most eye-catching line.</p> <p>“The swap proposal was aimed at turning an unsustainable bond into a sustainable one. Local bondholders were cooperative, but a group of foreign funds who controlled the majority of the bonds were not. (…) These funds said they would only be interested in a swap for a short-term dollar-denominated bond, which this government considers incompatible with its strategic goal of re-building the sustainability of Argentina’s debt,” Guzmán’s press release argued.  “They asked to be treated as a dollar-denominated bond and to be paid in the short-term. Not a very cooperative approach despite being partly responsible for this crisis,” the statement said in closing.</p> <p>In the end, Guzmán, seen as more of a moderate, ended up being tougher with investors than Buenos Aires Province Governor (and former Cristina Fernández de Kirchner Economy minister) Axel Kicillof, who a week ago decided to fold and <a href="https://gettheessential.com/economy/2020/02/06/ba-province-folds-and-pays-debt-in-full-at-the-last-minute">pay investors in full</a> when they refused to accept a haircut.</p> <h2><strong>A method to the madness?</strong></h2> <p>So why did the country’s two most important governments take opposite decisions only a week apart?</p> <p>According to some analysts, Guzmán had to take a stronger stance in order to not look weak ahead of future negotiations. “If the AF20 was paid, no one would have ever entered into a debt swap again. I think the decision was the right one,” Santiago López Alfaro from the Delphos consultancy agency said. Of course, others disagreed. &#8220;Re-profiling one bond alone does not seem efficient, as there are more maturities over the coming weeks. A re-profiling does not help given the high participation of international investors that will then also be participating in other renegotiation rounds,&#8221; JP Morgan&#8217;s Diego Pereira <a href="https://www.clarin.com/economia/jp-morgan-tenedores-af20-mismos-van-mesa-reestructuracion-_0_u3VYLP8e.html">said</a>.</p> <p>As well as showing teeth ahead of future negotiations, there was also another decisive factor behind Guzmán&#8217;s decision. Buenos Aires&#8217; Province’s BP21 bonds were created under New York law, while the national AF20 bonds, although mostly held by foreign funds, were under Argentine jurisdiction.</p> <p>A Buenos Aires Province default last week would have been Argentina’s first international default, which both the Macri and the Fernández administrations have been looking to avoid in the hope of eventually returning to global markets. A new default on local debt is not seen as a game changer of that magnitude.</p> <p>In addition, being under Argentine jurisdiction means that a defaulted AF20 bond cannot be bought on the cheap by so-called “<a href="https://gettheessential.com/economy/2019/09/19/vulture-funds-look-closely-at-argentina-holdout-bondholders-debt-bonds">vulture funds</a>.” Under New York jurisdiction, that type of fund could end up suing Argentina for full payment and more, by imposing painful international penalties on the country, as it has happened in the past.</p> <h2><strong>Looking forward</strong></h2> <p>In his presentation before Congress yesterday, Guzmán said the case of the AF20 bond was special, and that Argentina would continue to serve the maturities of other bonds over the coming weeks.  He added that March’s restructuring proposal would offer the same terms for local and international debt holders.</p> <p>As for the effect of this week’s default on the broader March debt-renegotiation, some analysts said it could have an impact, given that some of the bondholders are the same. But overall, the main factor for March remains the offer that Argentina presents, and whether the plan to raise the funds to pay back is seen as credible by investors.</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.