Argentina heads for ninth sovereign debt default

Argentina heads for ninth sovereign debt default

Analysts expect the country to make bondholders an offer they cannot accept

Argentina is heading for its ninth sovereign debt default, analysts have warned, with increasingly frustrated investors set to reject the government’s debt restructuring offer due this month.

Last week, the centre-left government delayed payments on $10bn of local-law debt, a move seen by many as a signal of what is to come.

After missing a self-imposed deadline of March 31 to reach a deal on $83bn of external debt owed to private investors, officials said last week that talks would continue until at least the end of this week.

The process, already beset with delays, has been further set back by the disruption on financial markets caused by the coronavirus crisis, which analysts said would make it easier for President Alberto Fernández to justify a default.

Carlos Abadi of Decision Boundaries, a financial advisory firm, said the government risked making an offer to investors without first ensuring it had enough of them on side. “I fear that Argentina may jump into the pool without first making sure there is water in it,” he said. “The result is likely to be a failure of the offer and, hence, default.”

A bondholder involved in negotiations said Argentina was heading towards a “hard” default, with no prior agreement with investors. “It is very hard to be optimistic,” this person said.

Prices of Argentina’s sovereign dollar bonds have plummeted in a broad sell-off of riskier assets due to the coronavirus pandemic, to levels suggesting investors expect an imminent default.

The country’s international bond maturing in April 2021 has fallen 45 per cent since the beginning of March and now hovers around 30 cents on the dollar. The country’s once-vaunted 100-year bond, issued in 2017, has plunged to 26 cents on the dollar, a more than 35 per cent fall since the beginning of March. 

“Seeing where bond prices are now, the government probably feels more empowered and believes it can put forward more aggressive terms,” said Patrick Esteruelas, head of research at Emso Asset Management. That would make negotiations with bondholders even more protracted, he said.

Settling Argentina’s debt issues was widely seen as essential to solving its economic woes, including a recession now in its third year and inflation of about 50 per cent. But any sense of urgency in government for doing so has diminished since the spread of Covid-19.

Threadneedle, said he expected Argentina to fall into hard default at that point. “If negotiations aren’t progressing and it looks like a deal can’t be done in the 30-day grace period, it doesn’t make a lot of sense [for the government] to let go of $500m,” he said, especially as net foreign exchange reserves have dwindled to about $12bn.

But others say a default is not yet inevitable. Some analysts recommend a standstill in negotiations until the coronavirus crisis has passed and Argentina’s economy has stabilised. Mr Abadi said creditors would accept “a one-year reprofiling”, which would also satisfy Argentina’s need to stop bleeding dollars through debt payments.

“If a debt deal was improbable last year, in this context it looks nearly impossible. But the crisis opens a new door,” said Eduardo Levy Yeyati, a local economist, who sees a standstill as Argentina’s only viable option.

He argued that such an offer to bondholders could be “sweetened” by using some of the $13bn that remains to be disbursed from Argentina’s currently suspended $57bn IMF programme — implemented when it came to the country’s rescue during a currency crisis in 2018 — as an upfront payment to creditors.

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