Market turmoil complicates Argentina foreign debt restructuring
Argentina’s new Peronist government has been caught off guard by global financial market turmoil at a crucial point in its talks with creditors to restructure more than $100bn of foreign debt, raising the risk that the negotiations could be delayed and result in a messy default.
Martin Guzmán, economy minister, has met investors for preliminary talks and was due to unveil the government’s initial offer this week. An official timetable envisages wrapping up the debt restructuring by the end of this month, something most investors believe is not realistic.
Now the collapse in the global oil price and heavy falls in equity markets have created new uncertainty. Argentina’s Merval index fell 14 per cent on Monday, almost double the percentage drop in US stocks, highlighting the fragility of an economy still mired in recession.
Lower bond prices also increase the threat that so-called “vulture” funds buy up Argentine debt cheaply in order to sue for repayment in full, as a group of investors did successfully after Argentina’s last debt restructuring following the country’s historic 2001 default.
“The world is conspiring to make our exit [from crisis] more difficult,” President Alberto Fernández said in an interview with Argentina’s Canal 9 on Monday, adding that as a result of the market turmoil the country’s economy would contract this year “for sure”.
In another signal of a possible delay, a government official said that while more information about the debt restructuring might be available later this week, the full offer to creditors would not.
Argentina’s country risk — a gauge of how risky a country’s bonds are, measured by the difference in the yield on its sovereign bonds over comparable US Treasuries — hit a 15-year high of 2,850 basis points on Tuesday, according to JPMorgan data, as investors marked down expectations.
The plunge in the global oil price has raised questions over plans to exploit shale reserves in Patagonia to create a big stream of export revenue, one of the pillars of the government’s economic strategy. The economic slowdown triggered by the coronavirus is hurting demand in China, Argentina’s second-biggest export market. And Argentina’s chances of regaining access to international markets look even more slim as investors rush for the safety of G7 government debt.
Some investors are pointing out, however, that the recent sell-off in Argentine bonds could give Mr Guzmán more room to make an offer that is acceptable to all sides, because lower debt prices would theoretically make it easier for bondholders to agree a haircut. The turmoil had pushed prices of the 100-year Argentina dollar bond down to 35.7 cents on the dollar as of Tuesday, from 39 cents last Friday.
“It’s really bad timing,” said Alejandro Cuadrado, a Latin America strategist at BBVA, arguing that the market turmoil could provide officials with an excuse to stretch out an “ambitious” timetable.
Mauricio Macri, Mr Fernández’s predecessor, rapidly increased external borrowing, including a record-breaking $57bn IMF bailout, hoping that investor-friendly policies would restore confidence to a country that has had a succession of economic crises over the past 50 years. Instead, a deep recession followed.
Mr Fernández and his team concluded that the country’s mountain of foreign debt was unpayable. He has authorised Mr Guzmán to renegotiate $69bn of Argentine sovereign debt held by private creditors and governed by international law; the government also plans to restructure up to $50bn of debt governed by local law, where there is greater room for manoeuvre.
Once that is concluded, Argentina would discuss new terms for $73bn of lending from multilateral bodies, including $44bn already disbursed by the IMF.
A centre-left leader with a reputation for pragmatism, Mr Fernández’s strategy has been to stabilise the economy with capital controls and tax increases on the wealthy while he seeks to renegotiate Argentina’s debt mountain and tackle poverty.
His administration is following an unusual route by trying to conclude an agreement with creditors before it announces any detailed economic strategy or reaches a fresh agreement with the IMF.
A number of Argentina’s big creditors spent last week in Buenos Aires for meetings with Mr Guzmán, but “they are none the wiser”, according to one local banker.
“There is no confidence in the peso, no growth model, no plan for domestic rollover and no obvious fiscal discipline,” concluded Siobhan Morden, head of Latin American fixed income at US broker Amherst Pierpont after her recent visit to Buenos Aires.
The government was already facing criticism for moving too slowly on the debt talks because of concerns that scarcely $12bn of liquid foreign exchange reserves will not cover debt payments coming due this year. ING estimates that this year alone the Treasury’s debt servicing requirements total $18bn.
“There is a growing concern that the government hasn’t resolved [economic] questions that people thought had already been settled,” said Daniel Marx, a former finance secretary. “There is a serious risk of a take-it-or-leave-it offer, or simply that there is no agreement at all.”
The IMF, meanwhile, has been supportive of the Fernández government. Last month it called for private creditors to accept a “meaningful” loss on their investments.
The crisis is increasing strains within the government between Mr Fernández and Cristina Fernández de Kirchner, vice-president. Ms Kirchner, a former president from 2007 until 2015, hails from the more radical wing of Peronism and her administration was marked by price and exchange controls, expropriations, high inflation and big deficits. Ms Fernández wants a harder line with creditors. She has already called for the IMF to take a haircut on its loans.
“While Alberto Fernández might want a friendly agreement with creditors to regain access to credit, the Kirchneristas are not particularly interested in this,” said a senior foreign diplomat in Buenos Aires. “In the medium term, the more moderate Peronists cannot coexist with the Kirchneristas . . . the sheep and the wolf are in the same room.”
Michael Stott and Benedict Mander