Does the global crisis make a debt haircut in Argentina more likely?

2nd April 2020

By Fermín Koop

Does the global crisis make a debt haircut in Argentina more likely?

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With many of the world’s biggest economies in lockdown, the coronavirus outbreak has led to weeks of frenetic trading, with global stocks heading towards their worst quarter since the 2008 financial crisis. For many this is be very bad news, and Argentina is not the exception. But the government might see one good thing come out of it, some analysts speculate: bondholders could be more open to accept a debt haircut if Economy Minister Martín Guzmán includes it in his debt-restructuring offer.

</p> <p>The Fernández administration is due to present its proposal to private creditors in the next few weeks. They currently hold US$83 billion in Argentine bonds – although the paper is worth much less at its current trading value. With massively devalued bonds in their hands amid a global crash in the riskiest bonds, the government hopes it might find increased appetite for a deal that improves the mark-to-market value of the holders&#8217; portfolios.</p> <p>The offer, which was supposed to be presented this week but was delayed, will be in line with the advice given by the International Monetary Fund (IMF) to Argentina to delay any payments for five years. Haircuts of the debt and of the interests could also be included, according to Guzmán.</p> <p>“We are trying to make an offer as fast as possible. We are looking at including several instruments in the proposal,” Guzmán <a href="">said</a> this week, mentioning the possibility of conditioning debt payments to the country’s future economic growth among other options.</p> <h2><strong>Steep drop</strong></h2> <p>Argentine bonds have dropped between 35 and 50 percent in March, making them the most severely hit by the global crisis in Latin America.</p> <p>“The higher global risk has had a strong effect on the price of the bonds. But that’s not the sole factor influencing them. Investors are expecting an aggressive proposal from Argentina to its creditors, which means higher changes of a default,” Martín Polo, head of research at Mills Capital Markets, told <em>The Essential</em>.</p> <p>Bonds are currently trading between 25 to 30 cents to their full dollar value. This means pitching a proposal to the creditors to pay bonds at 40 to 50 percent of their value could be much better welcomed than a month ago. Such a figure would not be too far away from the deal sealed between Argentina and a majority of bondholders after the 2001 default.</p> <p>The global crisis could open up a window of opportunity for the government to insist on an “aggressive” proposal, not paying capital or interests for several years in order to regain sustainability through economic growth in the meantime. Nevertheless, positions between both negotiating parties still remain distant to see if this will work.</p> <p>“The global framework can help achieve a successful debt restructuring process,” Hernan Letcher, head of the Political Economy Center, said. “The proposal that the government wanted to do two months ago, but which creditors could refuse, suddenly became more attractive.”</p> <p>&#8220;An aggressive offer is much more acceptable today. Argentine bonds went from 40 cents to the dollar to 25. Guzmán has a penalty kick with no goalkeeper,&#8221; former Central Bank chief and opposition economist Alfonso Prat-Gay also <a href="">quipped</a> defiantly.</p> <h2><strong>Economic plans</strong></h2> <p>Creditors are eager to know what Argentina&#8217;s economic plan will be to make any post-deal payments feasible. But Guzmán hasn’t disclosed such plan yet. Even if a draft was drawn, it was probably altered by the global crisis already.</p> <p>A hint at the macroeconomic roadmap was given this week, as the government published the <a href="">debt guidelines</a> – which said the country aims to return to accumulating reserves, with a goal of US$65 billion in foreign reserves by 2024. Reserves closed last week at US$44 billion.</p> <p>“The government needs to achieve a strong debt haircut. If not, it will be forced to restructure its debt again in a few years,” said Sebastián Maril, analyst at Research for Traders. “That’s why the offer will be aggressive so to try to reach a middle ground in the negotiations.”</p> <p>Argentina had initially intended to launch an offer for creditors by mid-March and strike a deal by the month’s end. That schedule has been delayed by the pandemic, however, which has lead to the cancellation of roadshows, replaced with digital meetings with creditors instead. The final offer should come in the next few weeks.</p> <p>In the meantime, the government keeps paying its debt to avoid falling into a default and lose the chance of an orderly restructuring with creditors abroad. This week USD 248 million from the country&#8217;s Central Bank reserves were used to pay interests from the Par bond, which was issued after the debt restructuring from 2005 and 2010.</p> <p>In just 20 days, another payment of USD 503 million will be due, corresponding to interests of the Global 21, 26 and 46 bonds. By this point, the offer should have already been presented, so an open question remains on whether such payment will be made.</p> <p>“The clock is ticking and the foreign currency reserves keep dropping. The government needs a resolution to all this situation as soon as possible,” Matías Rajnerman, head economist at Ecolatina, said. But Rajnerman is not as sure as others about the willingness of bondholders to seal a deal that includes a haircut. “The global crisis created more urgency. But only for the government, the creditors are in no rush.”</p> <h2><strong>Who owns the bonds?</strong></h2> <p>While it comes up with a debt restructuring proposal, the government is trying to get a grasp at who are actually the holders of the bonds of Argentina. The recent lower prices of the bonds probably spiked the interest of the so-called “<a href="">vulture</a>” funds, which could try to block the debt restructuring.</p> <p>Nevertheless, doing so wouldn’t be as easy as in the past. The most recent bonds issued by Argentina have collective action clauses (CACs), which force the holdouts to own at least 25 percent of each bond to block the negotiation. So far, it’s unclear how much they have, experts say.</p> <p>“The bonds are active in the market, meaning there’s a lot of purchases and sales going on. Nevertheless, we don’t know yet who are the holders,” Maril said. “What’s certain is that the lower prices are inviting ‘vulture’ funds to buy debt and try to block the negotiation.”</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.