Argentina debt restructuring offer leaves investors cold
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Investors have recoiled at Argentina’s harsh debt restructuring offer on $83bn of foreign debt that many warned would lead to the country’s ninth default if the government refuses to improve its terms.
The Latin American country’s economy has been hard hit by the coronavirus crisis, but it was unclear whether the leftist government’s attempt to avoid all debt obligations for the next three years and cut interest payments by 62 per cent represented a final offer, or just the beginning of tough negotiations.
“If it is a take-it-or-leave-it offer, then there won’t be an agreement,” warned one international creditor close to the negotiations.
Echoes of Argentina’s last major default in 2001 increased investors worries, as President Alberto Fernández appeared to be seeking to please voters at home while ignoring investors’ calls for a coherent plan for reviving an economy now in its third consecutive year of recession.
The stakes for securing a deal have been heightened as Argentina’s economy has little fiscal space to manoeuvre and is already battling high inflation as the pandemic throws the global economy into disarray.
Without plans explaining how the government can repay a debt burden it insists is unsustainable — a claim that is backed by the IMF, Argentina’s largest creditor after lending the country $44bn since a currency crisis in 2018 — analysts say there is little incentive for them to sign a deal.
“Argentina continues to seek maximum [debt] relief without articulating a credible plan for how the debt will be paid in the future. Money for nothing does not sell well even in the best of times,” said Walter Stoeppelwerth, chief investment officer at Portfolio Personal Inversiones, an investment firm in Buenos Aires.
He argues that the government’s aggressive proposal “points to a ferocious negotiation that will only end in one of two outcomes: hard default or Argentina sweetening the deal terms . . . When push comes to shove, Alberto Fernández will have to take a political decision to make a deal.”
Sebastián Brown, Deutsche Bank’s chief economist for Latin America, described the “hardball” offer — which included a drastic reduction in interest rates to an average of just 2.3 per cent, compared to a current average of around 6.6 per cent — as “very unpalatable for creditors”.
He predicted a hard default given that it will be “difficult” to reach a deal within the next 20 days, as the government wants.
Jared Lou, a portfolio manager at William Blair Investment Management, described the terms as “garbage”. He warned against a repeat of Argentina’s restructuring experience following the 2001 default, seeing similarities between Thursday’s proposal and the offer made in 2005, which led to an acrimonious legal battle with bondholders that was not solved until 2016.
“If they think that will fly again, forget it. They will need to offer something better than that, especially if they think they need market access,” said Mr Lou.
He does still believe common ground can be found because of the damage to the economy from the coronavirus crisis, with many creditors open to accepting debt relief in the short term.
“It is understandable that the coronavirus shock has probably increased the need for debt relief, but that needs to be reflected fairly,” said Michael Hugman, a portfolio manager at Investec Asset Management in London.
He compares the “aggressive” reduction in coupons to levels used in some African countries that participated in the Heavily Indebted Poor Countries (HIPC) debt relief programme. “It is hard to argue that Argentina needs the same kind of treatment,” he said.
The government published further details of its debt plan on Friday evening, presenting investors with the option of swapping their current bonds for a series of new debt instruments.
Previously restructured bonds issued in 2005 and 2010 are included in the government's offer as well as bonds issued since 2016. The older bonds require a higher percentage of investors to agree to any changes to the payment terms of the debt, meaning a deal may be harder to strike.
Under the proposal, Argentina would not make any principal payments until 2026. The first interest payments would come in 2023, stepping up in size thereafter.
While Mr Fernández has insisted that Argentina does not want to default, he also argues that the economy needs to be able to start growing again — with the IMF predicting a contraction of 5.7 per cent this year due to the impact of Covid-19 — before it can start repaying its debt.
But a default could be both economically and politically costly for the government. “Economically, it is hard to see a default generating any benefits at all,” said Ignacio Labaqui, an analyst at Medley Global Advisors.
Not only would a default exacerbate the country’s existing economic woes, including inflation of around 50 per cent and a currency that is perpetually prone to devaluations, but it would complicate access to international credit for Argentina’s private sector as well as the government.
“Politically, it is possible that there could be some short-term benefits,” added Mr Labaqui, as Argentines “rally round the flag” against perceived mistreatment by creditors.
He compared such a move to the decision of Argentina’s military dictatorship to invade the Falkland Islands in 1982, which ultimately precipitated its downfall. “Any political returns will be shortlived.”
Given the stakes, one emerging markets debt investor said they believe the government “will blink” before a hard default. “While [the] announcement is still far from getting us a deal, it’s way too early to throw in the towel.”
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