Argentina shows debt proposal, but parts are still too far

16th April 2020

By Ignacio Portes

Argentina shows debt proposal, but parts are still too far

The first details of Argentina’s debt restructuring proposal to bondholders were unveiled today, with Economy Minister Martín Guzmán calling for a 3-year grace period, a 5 percent haircut on principal and a 62 percent reduction in interest payments.

Bondholders will have 20 days to accept or reject the proposal, whose full details will be published tomorrow. While on first look the proposal looked more generous than expected, Guzmán admitted that “the reality is that we have not reached an understanding with bondholders on what a sustainable program would be”.

Speaking with The Essential, bondholders said the government looked like it wanted to reach an agreement, but the initial proposal was too low to convince them.

</p> <p><iframe title="&quot;Estamos en default virtual, hoy la Argentina no puede pagar nada&quot;, Guzmán con Fernández y Cristina" width="1778" height="1000" src="" frameborder="0" allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe></p> <p>Dollar-denominated bonds rallied after the news, but the move had low volume and faded as the season closed. They are still generally trading below 30 cents per dollar, a prince signaling something close to default.</p> <h2><strong>Both sides set their limits</strong></h2> <p>Guzmán signaled this would be Argentina’s final offer, recalling that the proposal is in line with what the International Monetary Fund sees as sustainable, and arguing that the country cannot go for the type of fiscal austerity that bondholders demand.</p> <p>“A rapid and larger austerity program would destroy opportunities for millions of people in Argentina. We are not going to allow that. There’s a limit up to which you can go and that limit is the proposal that Argentina will present tomorrow,” Guzmán said.</p> <p>Speaking after the minister, President Alberto Fernández said he inherited the country in a “virtual default” and that tomorrow’s proposal was one the country was “capable of complying and paying”. Fernández aimed at striking a balanced tone, emphasizing that Argentina tried to be a serious negotiator and not use the pandemic as an excuse to delay its proposal, but also speaking of the need to protect Argentina’s most vulnerable from the crisis.</p> <p>The speech suggested that Argentina is not willing to go much further in its offer.</p> <p>Bondholders, however, are also striking a similar tone, suggesting that they are not as willing to negotiate as they were in 2005, during the country’s last debt restructuring when most eventually ended up cutting a deal.</p> <p>“Most bondholders don’t give a shit anymore. They’ve lost so much money (with Argentine bonds). This is about setting an example now,” sources in the US bond market told <em>The Essential</em>.</p> <p>In this view, recovering the funds that were sunk in Argentina is not as important to bondholders, as the country represents only a small fraction of their portfolio. Showing strength before other countries look for a haircut might be more important than losing in Argentina, so they might prefer leaving without a deal over ceding too much ground.</p> <h2><strong>Details of the proposal</strong></h2> <p>Both Guzmán and Fernández emphasized unity in their messages, in a presentation that included the surprise presence of Vice-President Cristina Fernández de Kirchner as well as opposition governors including Buenos Aires City mayor Horacio Rodríguez Larreta, arguably the most visible leader of the opposition since Mauricio Macri’s presidential defeat.</p> <p>The presentation was short, lasting barely 12 minutes. The fine print of the proposal will be known tomorrow, but some things can be inferred already from Guzmán’s words.</p> <p>The minister is looking for relief especially in the short term. In addition to the three year grace period, interest payments will be structured to make them grow progressively.</p> <p>The proposed 62 percent haircut on interest will result in a 2.33 percent average yearly rate, but the first coupons will have a 0.5 percent average rate, growing up to more than 4 percent for the last years of the new bonds. This means that long-term bonds are likely to lose less value in the end if the restructuring goes forward.</p> <p>Overall, the country wants to save USD 3 billion in capital and USD 37 billion in interest, although the exact distribution of these losses across the 21 bonds eligible for the restructuring will be known tomorrow.</p> <p>Although the proposal is limited to Argentina’s international bonds, analysts expect local bondholders to get similar treatment if the agreement goes through.</p> <h2><strong>Ready for default</strong></h2> <p>Argentina has “re-profiled” (unilaterally postponed) several of its local bonds over the last few months, in what most analysts see as a selective default. But it has carefully avoided defaulting any bond with US as its legal jurisdiction, looking to escape a new protracted legal conflict as the 15-year saga with holdouts after the 2001 default.</p> <p>But the clock is running out, with a new dollar-denominated payment due on April 22. The government is unlikely to pay that maturity next week, making use of the 30-day grace period included in the contract instead.</p> <p>But will it pay at the last minute in May if negotiations don’t progress, just as Buenos Aires Province Governor Axel Kicillof did early in <a href="">February</a>?</p> <p>The global economic crisis unfolding since the COVID-19 pandemic exploded in the West suggests this is much less likely this time, as Argentina will want to preserve the little dollars it still keeps in its coffers in case of emergency.</p> <p>Although Guzmán prefers to reach a deal, a full default including New York bonds was never completely unthinkable. People closer to the original leaders of Kirchnerism have sometimes mentioned it as a “Plan B”, and it is not rare to hear even the most fervent pro-market analysts in Argentina suggesting that there is likely no alternative – especially if they are not holding any of those bonds themselves.</p> <p>A default, then, should not come as a surprise if it&#8217;s eventually confirmed.</p> <p>Some analysts believe the government is still somewhat bluffing, and would eventually be willing to settle for less. &#8220;The government is negotiating, this is its starting point,&#8221; Analytica consultancy agency&#8217;s Rodrigo Álvarez said.</p> <p>Among those negotiating with the government are the Pacific Investment Management Company (Pimco), Blackrock, Fidelity, Greylock Capital and more. 

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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.