Argentina’s creditors must face up to the coronavirus challenge
Kevin P. Gallagher (@KevinPGallagher) is professor and director of the Global Development Policy Center at Boston University’s Pardee School of Global Studies. He serves on the T20 Task Force on the International Financial Architecture to the G20. In this post he argues that creditors and the IMF must move swiftly to stop an economic and humanitarian crisis unfolding in Argentina.
During ever financial crisis comes a siren’s call for a global sovereign debt restructuring instrument. The conditions under which a debt renegotiation occur can be brutal for all parties, no matter which side of the table they’re sitting on.
Argentina is going through such an ordeal again, and at the worst possible time.
Even before the COVID-19 pandemic, Argentina’s new government inherited an economic crisis along with the largest International Monetary Fund (IMF) programme in history. To try and jump-start an ailing economy, former president Mauricio Macri went on an international borrowing spree and deregulated financial markets to send positive signals to market participants weary of Argentina’s long history of botched reform.
However uncertainty in 2018, due to both moves by the US Federal Reserve and Trump’s trade war, triggered a run on the Argentine peso which caused its dollar-denominated debt to balloon. Macri was forced to go to the IMF, which conditioned a $57 billion rescue package that arguably locked in the same problems which caused the economic crisis to begin.
In early 2020 Alberto Fernández’s recently formed government started working with a refreshed IMF, led by Kristalina Georgieva, to come to a solution. While praising the government’s efforts to stabilise the country’s economic situation, Georgieva’s team declared Argentina’s debt situation “unsustainable”. Georgieva also added that “substantial debt relief from Argentina’s private creditors will be needed to restore debt sustainability with high probability”.
The IMF’s March assessment, before COVID-19 had truly bared its teeth, pinned Argentina’s external private sector debt at $80 billion, $66 billion of which is due in the next few years. In addition to declaring the country’s debt “unsustainable”, the IMF concluded that their “analysis shows that there is virtually no scope for FX debt service payments to private creditors during 2020–24”. The IMF was careful to note that this grave assessment could be conservative if a “stronger-than-projected negative impact of the COVID-19 pandemic, which could more adversely affect Argentina than currently assumed”.
Fast forward to mid-April and the IMF revised their outlook on the world economy, declaring that the COVID-19 crisis would bring “the worse economic downturn since the Great Depression”.
Despite this turbulence, Argentina has put forward a pragmatic proposal to reprofile their debts. Martin Guzmán — the Minister of Economy — released his initial offer to bondholders on Thursday, April 16. Guzmán declared 21 bonds worth $66 billion as eligible for negotiation, 63 per cent of which were issued in the past four years — the so-called ‘“Macri bonds”.
Rather than seeking a major haircut to the base capital of these bonds, Argentina has asked for an extension of the grace period on repayment for three years, consistent with the IMF’s assessment. Instead, the majority of a haircut would come in the form of interest rate reductions of 62 per cent. All in all, Guzmán and team are only asking for $3.6 billion in core capital restructuring; just 5.4 per cent of the total.
This good faith offer should not only be negotiated swiftly in order to avoid a further economic collapse or to help bondholders earn a return, but to avoid the spread of the virus across Argentina.
Anne Krueger, the International Monetary Fund (IMFs) first Deputy Managing Director lamented in 2001, “we lack incentives to help countries with unsustainable debts resolve them promptly and in an orderly way”. She called it one of the “glaring gaps” in the international financial system. Since there has been some modest reform but, as the current Argentine restructuring shows, problems remain.
For instance, Collective Action Clauses (CACs) in bonds have become more widespread in the past half decade. These are obligations that mandate if a supermajority of bondholders agree to a debt restructuring then all other holders of the bond must as well. Argentina’s current restructuring will be the first major test of CACs since their modern inception in 2003, and the introduction of ‘single-limb’ CACs in 2015. So far CACs have been of limited success because bondholders are often dispersed across the world which makes it hard to organise a vote to get a supermajority.
Another issue, which Argentina is now facing, is referred to as the “aggregation problem”. Restructurings increasingly involve multiple bond issuances and CAC provisions do not hold for collective action across multiple issuances, as they only cover individual bonds. More recent ‘single-limb’ CACs (which allow bonds to be restructured with just a single vote across a series of bonds) were meant to have alleviated the aggregation problem, but their use is still not widespread.
As some of Argentine bonds are CACs, some even single-limb, and others are not, the use of these clauses are extremely limited. Bloomberg has reported that “holdout” owners of the Argentine bonds are targeting these legal loopholes in order to slow down the restructuring process and get the full value of their interest payments.
Argentina is clearly willing to negotiate but it should not have to pay the price for the lack of an orderly system to resolve unsustainable debts. Particularly when time is not only money, it is death.