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Argentina Needs Goodwill From Bondlords, Or Else

Argentina Needs Goodwill From Bondlords, Or Else

Friday is shaping up to be yet another Argentina bond default day. If it’s not, then Argentina has its investors to thank. It would mean they agreed to some sort of delay, despite already delaying payment on bonds due in the first quarter to sometime later in the fourth quarter.

“Argentina has a very narrow path to economic recovery, and that path includes a restructuring deal. Without it, Argentina faces a troubling outlook not just this year, but for several years to come,” says Fiona Mackie, regional director for Latin America at The Economist Intelligence Unit.

The grace period on a $500 million coupon payment ends tomorrow. In the late hours, there has been no obvious signs of a resolution between the Fernandez Administration and its Wall Street and London investors.

“There is also not much respect for tight deadlines and no apparent fear of default,” says Siobhan Morden, head of Latin America fixed income strategy for Amherst Pierpont Securities in New York. “The Province of Buenos Aires defaulted (last week).”

Argentina’s sovereign debt is next. Unless tomorrow or later tonight we get a last minute intervention from President Alberto Fernandez.

If there is no goodwill from investors and Fernandez it will allow for more breathing room in a country that is notorious for never paying what it owes, and asking for deep discounts on principal.

They have cleverly used the coronavirus pandemic as a means to argue against payment. It is impossible to argue against it. The country is on lockdown and Argentina, like elsewhere, has been bracing for the worst from the Covid-19 disease.

Meanwhile, the country is mired in increasing poverty. Voters were hoping the duo of Fernandez and Kirchner could see the bulk of them out of it. Paying investors may look bad to the electorate, but it’s necessary for the long term success of Argentina.

But to avoid a default, it will have to be sufficiently inconvenient for the government, a government which won on anti-IMF sentiment. It does not seem like they are worried about not being able to work with New York and London capital markets again.

For now, left wing populist Cristina Kirchner, Fernandez’s vice president, seems set just to keep Argentina stuck in the 1960s. The entire middle class there survives on dollars, anyway. As does Argentina’s political elites.

BNP Paribas said in a note today that Argentina is one of the last countries prepared to benefit from the remapping of supply chains out of China. It was on par with Egypt and Ukraine.

There is no light at the end of this tunnel.

The country is already reeling from currency devaluation, economic recession (again), and a sustained loss of consumer purchasing power.

A deal tomorrow would be great for currency and bond speculators. But it won’t unlock the door to private foreign capital. It would, however, open the door to the IMF discussion on a new lending deal.

Argentina owes the IMF over $50 billion. The country has around $12 billion in its foreign currency reserves, which is about $2 billion more than what Venezuela had before it defaulted.

Bond holder goodwill, coupled with IMF support to extending out its payments, with about half of it due next year, would give Argentina a very narrow path to recovery.

“The alternative is grim,” says Mackie.

The alternative includes the growing risk of a hyperinflationary spiral all while economic activity is in the gutter.

“We believe the government will ultimately be motivated to secure a deal, even if it looks set to default once again first,” she says.

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