Argentina seeks to restructure $101bn of debt

Argentina seeks to restructure $101bn of debt

Government wants more time to pay back borrowing as election turmoil plays havoc with economy

Argentina’s embattled government will ask its creditors including the IMF for more time to pay off $101bn of debts, as the country struggles to avoid a ninth sovereign default.

The Latin American country was plunged back into crisis this month after reformist president Mauricio Macri suffered an unexpectedly heavy defeat in a nationwide primary election, which all but wiped out his chances of re-election in October.

That sparked turmoil in Argentina’s financial markets. Bonds, currency and stock markets plunged on concerns that a government led by opposition Peronist candidate Alberto Fernández would mean a return to big budget deficits and jeopardise the country’s $57bn IMF bailout.

Mr Macri had hoped to project an image of confident economic management and avoid drastic measures before the election but a recent auction of short-term government debt failed to attract enough backing from investors, forcing Buenos Aires to take action.

Argentina plans to delay $7bn of payments on short-term local debt due this year and will seek a “voluntary reprofiling” of $50bn of longer-term debt — much of it held by foreign investors — as well as postponing the repayment of $44bn of loans already disbursed by the IMF.

“The government is aiming to clear the outlook for the financial programme in the short, medium and long-term horizon,” said Hernán Lacunza, the finance minister, late on Wednesday, according to media reports. “This is due to short-term liquidity stresses and not due to problems with the solvency of the debt.”

Mr Lacunza, who recently took over after his predecessor resigned in the wake of the primary election defeat, said the rescheduling of Argentina’s debts should give the government some vital repayment relief from 2020 to 2023.

Although Argentina is only seeking a voluntary extension of repayment times, rather than “haircutting” interest payments or the size of its debt, the move will probably be judged to amount to another sovereign default by some measures.

Markets had expected a debt restructuring after the August 11 election shock because the collapse in the peso had pushed up the cost of servicing Argentina’s mostly dollar-denominated debt sharply and boosted inflation. Capital Economics estimated earlier this week that the government had $30bn in debt falling due this year and another $50bn next year.

The IMF currently has a delegation in Buenos Aires assessing the government’s compliance with the bailout programme and will decide soon whether to disburse the next $5.4bn of loans. In a statement, the Fund said that it “is in the process of analysing [the debt operations] and assessing their impact. Staff understands that the authorities have taken these important steps to address liquidity needs and safeguard reserves.”

It concluded: “The fund will continue to stand with Argentina during these challenging times.”

Mr Fernández has been sharply critical of the IMF, blaming it along with Mr Macri for imposing a “social catastrophe” on the Argentine people, who are suffering recession, high unemployment and runaway inflation.

An economic adviser close to Mr Fernández said the government’s announcement was “a bombshell”.

“People who are seeking redemptions are not going to be able to get their cash,” he said. “The risk is how people react . . . The problem is if people react badly and you end up with a run on the banks. That can’t be ruled out.”

Mr Macri’s government had “set in motion a cumbersome process”, he added: “The government’s actions may not be enough, it’s a very delicate situation. I don’t disagree with what they have done, but I don’t know if it’s the best way to do it, and it’s a task that they won’t be able to complete — it will be up to us.”

Simon Waever, a strategist at Citi in New York, argued that the country’s bond market was already pricing in a significant risk of a default, probably limiting the fallout in markets.

“Extending maturities of T-bills and of locally held longer-term debt will be quicker than negotiating with external bondholders,” Mr Waever said in a note to clients.

“Bonds are likely to remain under pressure initially as a result of these announcements until there is greater clarity on future policies due to still heavy positioning. However, with prices already approaching 40 [cents on the dollar], we see downside as more limited.”

For Alberto Ramos at Goldman Sachs, the timing of the announcement was surprising. “If there is a political transition, the market was somewhat expecting that Argentina would have to reprofile their debt,” he said. “But what no one expected is that they would get the ball rolling with this administration.”

Mr Ramos said debt reprofiling will take time and would probably need to include the Fernandez team.

“Reprofiling is a very complex and time-consuming process,” he said. “The actors that will be managing this are unlikely to be this administration.”

Robin Wigglesworth in Oslo and Michael Stott in London

Additional reporting by Colby Smith in New York and Benedict Mander in Buenos Aires

What constitutes a sovereign default?

Defining a sovereign default is often tricky in practice, with many countries couching their debt restructuring in “voluntary” terms.

Typically one of the major credit rating agencies will declare a default or selective default when a country fails to adhere to all of its debt obligations, whether through late or incomplete payment or outright repudiation. Separately, a finance industry body under the auspices of the International Swaps and Derivatives Association can declare a “failure to pay” that triggers so-called credit-default swaps, a kind of insurance against debt defaults.

Countries can lengthen their repayment schedules without defaulting if they engineer a voluntary exchange of old bonds for new longer-term ones, perhaps sweetening the deal by offering higher interest payments in return. But such an exchange must not be coerced to be considered truly voluntary.

For example Greece’s record-breaking €200bn debt restructuring in 2012 was supposedly voluntary, but only happened thanks to government pressure on European banks and the use of collective action clauses — these meant that an agreement struck with a supermajority of creditors was binding on all creditors.

In Argentina’s case, it is likely that even a voluntary reprofiling would in practice adversely affect Argentine bondholders, and would therefore constitute a default — the ninth in the country’s history, and the third since the turn of the millennium.  Robin Wigglesworth es un sitio web oficial del Gobierno Argentino