Argentine Governor Rattles Markets With Plans to Delay Bond Payment
A far-left governor of Argentina’s most populous province is rattling investors with plans to hold off paying back foreign debt, raising fears that his faction of the ruling Peronist coalition could push the rest of the federal government into a messy new debt default.
Axel Kicillof, Argentina’s former finance minister and new governor of Buenos Aires province, has given creditors until Wednesday night to accept a three-month delay in the repayment of $250 million in foreign debt issued by the Buenos Aires province due this coming Sunday. Prices of those bonds plunged after his announcement last week. The debt is at risk of default if the deadline passes without a deal.
The move comes as Argentina’s federal government prepares for negotiations with creditors to try to restructure more than $100 billion in debt that the government says it can’t repay. Argentina defaulted on a similar amount of debt almost two decades ago.
The move by Gov. Kicillof, who took office last month, has sparked fears that his faction within the ruling Peronist coalition—a camp led by Vice President Cristina Kirchner —could push the government into a more aggressive confrontation with foreign creditors.
“The hard-line, antibusiness wing of the government is making a lot of noise,” says Arturo Porzecanski, an American University economist who closely tracks Argentina.
Investors were surprised by Gov. Kicillof’s move as they expected Argentine authorities to honor foreign-debt payments during negotiations to restructure the country’s sovereign debt, Mr. Porzecanski added. Newly elected President Alberto Fernández says the central government hopes to reach a restructuring deal by late March.
An adviser for a committee of Buenos Aires’s creditors declined to comment. In a December statement, the group said it was committed to “constructive dialogue with the province’s new administration.”
Many of the province’s creditors also are holders of Argentina’s sovereign bonds. They will be cautious in agreeing to anything with the Kicillof administration to avoid setting a precedent in talks with the central government, says Claudio Loser, an Argentine economist and the International Monetary Fund’s former Western Hemisphere director.
“They would rather wait than give this agreement to the Buenos Aires province,” said Mr. Loser. “This makes the market nervous because they don’t know exactly how this will end up.”
Gov. Kicillof, who in past administrations helped lead expropriations of foreign companies, needs the consent of holders of 75% of the bonds to delay the payment, a key test of the Peronist negotiating tactics.
The telegenic governor, a 48-year-old known for his long sideburns and rockabilly looks, says he wants to avoid a confrontation, but a potential default by the province could undercut the confidence of its creditors as many of them prepare for negotiations with the central government.
Like President Fernández, Gov. Kicillof has said that government coffers are empty and the debt burden is unsustainable. But President Fernández—seen as a more moderate and pragmatic Peronist—has pledged to continue servicing central-government debt during negotiations.
Provincial government officials say they are following a strategy in line with the federal government. “One difference is that the central government doesn’t have payments of capital maturing over the short term,” says Pablo López, the province’s finance minister. “The provincial government continues to pay interest on debt, just like the central government is.”
Argentina’s Finance Minister Martín Guzmán recommended creditors permit the provincial government to pay only the interest on the debt and extend payment of the principal until May so the central government can first negotiate a restructuring of the country’s sovereign debt.
“The solution to this problem of deep debt crisis will be more orderly and efficient if it’s the nation that leads the process,” he said in a news conference on Tuesday.
Some investors say Mr. Kicillof’s proposed debt restructuring lacks a credible plan for reviving the province’s economy and government finances.
“One of the concerns right now with the Buenos Aires bond and the push back to May is if you are building a bridge to nowhere,” said Jared Lou, portfolio manager of emerging-markets debt at William Blair, a Chicago-based investment bank. “They have not been able to show a credible path forward for the country or for bondholders to be repaid.”
Buenos Aires province faces a challenging year as the central government implements a fiscal adjustment plan that includes higher export taxes for farmers, many of them based in the province. It has some $3 billion in debt maturing this year, while authorities grapple with a 13% contraction in industrial output, plunging consumption and arrears with suppliers.
Federal government officials have said they won’t rescue insolvent provinces such as Buenos Aires, despite it being a Peronist stronghold and home to about 40% of the country’s population.
Argentine officials blame the previous free-market administration of former President Mauricio Macri and his close ally, the former Buenos Aires province Gov. María Eugenia Vidal. Both were defeated by the Peronists last year as inflation surpassed 50% amid economic stagnation and indebtedness grew out of control. In 2018, Mr. Macri was forced to take a bailout from the IMF, which is seen by the Peronists as a historic foe.
An influential adviser and protégé of Mrs. Kirchner, Gov. Kicillof was part of the group of young Peronist activists who presided over the nationalization of national carrier Aerolineas Argentinas, which became a drain on the treasury. Public spending doubled during the 12-year rule of Mrs. Kirchner and her late husband and predecessor, Néstor Kirchner.
Gov. Kicillof also played a leading role in the 2012 expropriation of YPF, Argentina’s top energy company, from Spain’s Repsol. In 2014, he battled hedge funds led by U.S. investor Paul Singer over billions of dollars in unpaid foreign debt, a dispute that culminated in a default after the government defied a U.S. court ruling in favor of what the government labeled as vulture funds.
—Jeffrey T. Lewis contributed to this article.