Argentina's external debt woes continue

Argentina's external debt woes continue

In recent days Argentina's troubled finances have once again been in the spotlight. On May 31st the federal government missed a payment of about US$2.4bn owed to the Paris Club group of bilateral creditors. The clock is now running on a 60-day grace period, by the end of which the Argentinian authorities must either reach a refinancing agreement with the Paris Club, service the debt in full, or fall into default once again.

Concurrently, at the sub-national level, the provincial governments of Buenos Aires and La Rioja are caught in impasses with private overseas creditors over the terms of their own debt restructurings. The Economist Intelligence Unit believes that neither situation will be fully resolved until after the November 14th mid-term elections. The developments serve to further undermine Argentina's creditworthiness and delay the country's eventual re-entry to international capital markets

In the run-up to the May 31st deadline, Argentinian officials were locked in intense deliberations with the various member states comprising the Paris Club. In early May the Argentinian president, Alberto Fernández of the left-wing Frente de Todos (FdT) Peronist coalition, even embarked on a charm offensive around Europe with the aim of securing leniency from creditor nations. Although both Argentina and its official creditors hailed the talks as constructive, a resolution—either in the form of a temporary waiver or a more comprehensive debt restructuring—has not materialised.

The sticking point in negotiations appears to be around the Paris Club's conditionality principle, which requires debtor countries to have a "demonstrated track record of implementing reforms under an IMF programme". However, the Argentinian government has decided to postpone securing an IMF deal until after the November mid-term polls, as a Fund-backed lending arrangement will come with a number of politically contentious conditionalities. In theory, the government could repay its Paris Club debt by drawing down on foreign reserves held by the Banco Central de la República Argentina (BCRA, the central bank). The BCRA has been able to accumulate reserves in recent months owing to a commodity boom that has bolstered foreigncurrency inflows. However, we do not expect the government to go down this path, opting instead to preserve the BCRA's firepower for hands-on exchange-rate management. In this context, although we do not entirely rule out the possibility of an agreement regarding the Paris Club debt, we consider it increasingly likely that Argentina will enter into arrears on its obligations once again.

Provincial debt talks also stall
Also contributing to the country's reputational damage are unresolved debt defaults at the sub-national level.

By June most provinces had reached deals with private creditors to restructure their bonded external debt, along the lines of the September 2020 sovereign debt restructuring. However, two provinces—Buenos Aires
and La Rioja—are still in a deadlock with their bondholders.

The lack of a restructuring agreement for Buenos Aires province is a significant cause for concern for investors, given that it is the most indebted of all the provinces. Talks to restructure the province's US$7.1bn in
bonded external debt have been ongoing since early 2020. However, despite several offers and counter-offers, a deal has yet to be reached. On June 7th the Ad Hoc Group of Buenos Aires Bondholders (which holds about 30% of the debt currently in default) released a statement claiming that its latest restructuring proposal complied with the provincial government's key demands but that the offer had nonetheless been rejected. The group went on to argue that the province was opportunistically seeking more debt relief than was justified by the near- and medium-term economic outlook.

For its part, the provincial government, headed by Axel Kicillof (FdT), responded by saying that further concessions would not be viable from a fiscal, financial or social standpoint. We had already highlighted the
likelihood that Mr Kicillof would not be amenable to a quick solution, as reaching a deal with creditors would require him to commit to a more austere fiscal policy, which could have negative ramifications for FdT candidates running in Buenos Aires province. Although Mr Kicillof continues to state that he is committed to reaching a negotiated agreement, bondholders are unwilling to give him the benefit of the doubt. The Ad Hoc Group has stated its intention to continue pursuing legal remedies via the US courts system.

Taken together, the various developments reinforce the high degree of financial risk involved in dealing with Argentina. Our forecasts continue to assume that ongoing debt disputes—at both the national and sub-national levels—will be resolved after the November elections, once the government has entered a new IMF programme. However, risks to the outlook are high. Even if debt restructurings are forthcoming, we expect the country's credit reputation to be severely impaired. As such, we do not expect Argentina to regain access to international capital markets in the 2021-25 forecast period, to the detriment of the post-pandemic recovery.

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