Argentina, slipping towards default, faces $500 million trip wire

Argentina, slipping towards default, faces $500 million trip wire

Argentina could be about to trigger a countdown to a new default if it fails to make interest payments on Wednesday of around $500 million on bonds included in a huge restructuring proposal to lighten the country’s crippling debt burden.

The three dollar-denominated bonds are part of a $66.2 billion proposal by the government to push maturities on its foreign debt back until the next decade, halt all payments for three years and gain debt relief of over $40 billion.

Creditors have around 20 days to accept the deal, but the real deadline could end up being payment on the bonds.

Argentina’s leaders have suggested that once a formal restructuring proposal was made, it would stop servicing payment on the debt involved. Those payments amount to around $3.5 billion for the rest of the year, government data show.

The April 22 payment comes with a 30-day grace period until May 22, after which if it remains unpaid and no deal with creditors is struck, Argentina would plunge into default, reviving memories of acrimonious battles with creditors after a major default in 2002.

“The offer, as it stands, I see it very difficult for it to move forward,” said José Echagüe, chief strategy officer at advisory Consultatio in Buenos Aires, adding Argentina could hold off payment but keep it as a trump card in talks.

“The government is keeping that as a negotiation tool in reserve, and could sweeten the deal by paying it in cash.”

The proposal was formally filed with the U.S. Securities and Exchange Commission this week, though major creditor committees have already rejected the current terms as overly tough. The government contends that the offer is final.

“This is the offer, this is what they have to decide on,” economy ministry Martin Guzman told local publication El Destape on Tuesday, adding creditors would have to decide whether to take it or leave it. “The offer is what it is.”

“The expressions of rejection were expected, it’s part of a process in which the other party seeks to pressure Argentina to offer more. But it cannot be done because it is unsustainable, and that’s not something we are going to do.”

Argentina’s economy ministry declined to comment on whether it would make the $500 million payment.

The country, gripped by recession for the last two years, is striving to revamp a larger debt pile that totals around $323 billion, though it has been hit by the global pandemic that looks likely to drag the country into a deep recession this year.

Argentine bonds, however, have risen since details of the proposal were unveiled, underscoring how the offer - while tough - was not as bad as some had feared, and prompted hope that the two sides could eventually reach an accord.

“Given what was proposed, it’s obviously not an appealing offer, but the distance between the offer and what might be accepted isn’t so far apart,” said Javier Alvarado from consultancy ACM in Buenos Aires.

He suggested that some earlier interest payments could be added as a sweetener without becoming untenable.

JP Morgan said that the $500 million interest payment could end up being used as a “stick” in negotiations, with the threat of default something investors may want to avoid.

With the economy increasingly frail, however, and investments in key areas like oil exploration already hurt badly by tumbling prices, the investment bank pointed out that there may be less barriers than usual to allowing a default.

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