Argentine bond risk spreads widen as market braces for possible default
The country’s segment of JP Morgan’s Emerging Markets Bond Index Plus shot out 136 basis points to 3,753 over safe-haven U.S. Treasury paper, indicating an increase in payment risk. Over the counter government bonds opened 1.2% weaker.
With its already weak economy further bloodied by a lockdown against the coronavirus that started on March 20, Argentina is contending with a mountain of what it has called “unsustainable” debt subject to a plan to revamp about $65 billion in bonds.
The plan drew initial boos from creditors. But the government and bondholders have until May 8 to negotiate a bond revamp deal. Both side have staked out tough opening positions.
“This is the offer, this is what they have to decide on,” Economy Minister Martin Guzman told local publication El Destape on Tuesday, saying creditors could take it or leave it. “The offer is what it is.”
Wednesday’s expected missed payment would trigger a 30-day grace period. If still outstanding on May 22, the government would lapse into default, reviving memories of acrimonious battles with creditors after a nonpayment in 2002 that set off the biggest economic crisis in Argentine history.
The economy ministry declined to comment on whether it would make Wednesday’s $500 million payment. But Argentina’s leaders have suggested that once a formal restructuring proposal was made, it would suspend interest payments on the debt involved. Those payments amount to around $3.5 billion for the rest of the year, government data shows.
“We understand that, after the official declarations already made, the $500 million interest payment on foreign law bonds due today will not be made,” Buenos Aires-based brokerage Portfolio Personal Inversiones said in a note to clients.
New bonds to be issued as part of the government’s proposed debt restructuring would contain so-called “collective action clauses,” allowing Argentina to alter terms of the debt without the consent of all holders, according to a filing made to U.S. regulators.
“The payment will probably not be made on Wednesday, but the government still has 30 days to pay without falling into default, said Gabriel Zelpo, director of Buenos Aires economic consultancy Seido.
“It is still early and the government has room to negotiate,” Zelpo added. “It knows a default would be costly.”