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Government sends bill to Congress to reprofile debt

Government sends bill to Congress to reprofile debt

On September 19th the administration of the president, Mauricio Macri, sent legislation to Congress aimed at reprofiling domestic-law debt

Analysis

The draft bill does not, at the outset, set terms and conditions for the reprofiling of public debt issued under local legislation, but instead sets the stage for negotiations with private creditors. In particular, the bill introduces the concept of a collective action clause for renegotiation of debt issued under local legislation; this framework is already applicable to debt issued under foreign legislation.

 The introduction of a collective action clause would effectively mean that if a supermajority of creditors agree on new terms for debt repayment with the government, these terms would have to be accepted by the remainder of the creditors. If a single class of bonds is being reprofiled, the terms would have to be accepted by three-quarters of bondholders. However, if two or more classes of bonds are being reprofiled simultaneously, the terms would have to be accepted by two-thirds of bondholders (provided that they represent a majority stake of each individual class of bonds). This clause essentially seeks to improve co-ordination among bondholders, while minimising risks from holdout creditors. (Argentina was forced into selective default in 2014, owing to a court ruling in favour of holdout creditors from the sovereign's previous default in 2001.)

Meanwhile, the government is moving ahead with negotiating debt-swap arrangements with creditors holding debt issued under foreign legislation. According to the finance secretary, Santiago Bausili, the government has already received 13 proposals from financial entities on how to reprofile debts issued under foreign legislation.

Although these developments are positive, challenges persist. In order to reprofile domestic-law debt, the government will first have to reach consensus with the opposition on its proposed legislation. The government has sought to negotiate with opposition lawmakers to gain support for the legislation, but they are unlikely to commit to its passage until it is supported by Alberto Fernández, the Peronist presidential front-runner. Mr Fernández has sent mixed messages about his view on debt reprofiling measures. Although we assume that he will ultimately support reprofiling, as it will ease his administration's financing needs, the bill's passage is likely to be delayed until the transition to a new government.

Impact on the forecast

 Our forecasts are unchanged for now, but are subject to revision pending the outcome of debt reprofiling arrangements (which are likely to be finalised in 2020).

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