Promise of ‘deep debt restructuring’ sent price of bonds lower last week
Financial Time – As Argentina attempts to win the IMF’s support for a $100bn debt restructuring, the sabre-rattling of the leftist government is stoking fears among creditors of a messy default.
Formal talks between the fund and Buenos Aires began last week and have already provided clues on how tough the process might be for bondholders. The price of Argentina’s government bonds sank after the 37-year-old economy minister Martín Guzmán told legislators on Wednesday that a “deep debt restructuring” would be required, and that the government would not try to balance its budget until 2023 at the earliest.
The country’s century bond — seen as a landmark in its economic recovery when it was issued three years ago — dropped almost 3 per cent the next trading day to 43 cents on the dollar, having started the year at more than 50 cents. The price of another government bond maturing in 2028 slipped to less than 45 cents. On Monday they remained close to these levels, which indicate a high probability of default.
Not everyone was convinced by Mr Guzmán’s tough rhetoric. “The youngster is living in Peronist La-La land,” said Walter Stoeppelwerth, chief investment officer at Portfolio Personal Inversiones, an investment bank. In Mr Stoeppelwerth’s view, neither the IMF nor the country’s creditors would accept a deal based on the government’s stated position.
However, concerns among investors were heightened after the new leftist president Alberto Fernández appeared on Thursday to endorse anti-IMF comments by his vice-president, Cristina Fernández de Kirchner. Ms Fernández de Kirchner, the combative former president from 2007-15, had remarked that the fund also needed to accept a “substantial” haircut, or loss, after lending Argentina $44bn since a 2018 currency crisis. The IMF’s managing director Kristalina Georgieva told Bloomberg on Sunday that a haircut would not be possible.
Last week, too, Argentina unilaterally postponed interest payments on a local currency-denominated sovereign bond, after it failed to convince enough investors to accept a loss on the face value of their debts.
Patrick Esteruelas, head of research at Emso Asset Management, said the tough stance from the government — which insisted that it refused to be “held hostage” by foreign holders of the bond — was an attempt to clean up a “mess” created by a recent stand-off between the Province of Buenos Aires (PBA) and its creditors.
The local government had tried to postpone a $250m January payment until May, but failed to convince its largest debtholder, Fidelity, which owns about a quarter of the province’s 2021 bonds. In the end, the province agreed to pay the money owed and pledged to restructure its remaining stock of foreign debt.
Marcos Buscaglia, a founding partner of Alberdi Partners, an economic consultancy in Buenos Aires, said the PBA episode showed Argentine policymakers were “afraid of a default”, which could trigger a renewed run on the peso and push inflation — which exceeded 50 per cent in 2019 — even higher. Argentina’s economy is in its third consecutive year of recession.
But according to Mr Esteruelas, the government’s decision to play hardball with holders of the local sovereign bond shows that it “internalised some of the lessons” drawn from the PBA affair. “This resets the stage,” he said.
Investors now insist that the government must present an economic plan that would explain convincingly how it plans to repay creditors, if it wants a swift and amicable resolution to the stand-off. So far, it has refused to do so.
“When there is so much uncertainty on the delivery [of certain economic targets], if you go to investors with haircuts . . . it is hard for them to be receptive,” said Polina Kurdyavko, head of emerging markets at BlueBay Asset Management.
“It is going to be a tough sell because time is on the bondholders’ side,” said Gustavo Medeiros, deputy head of research at Ashmore Group, another bond investor. “If they come and say a 50 per cent haircut and no coupon payment [for a few years], forget about it. There is no deal.”
Despite clear tensions between the government and private creditors, the role of the IMF is more ambiguous. Buenos Aires has had stormy relations with the fund in the past, but its endorsement of the government’s financial programme would help to seal a deal with creditors.
Analysts suggest that the IMF may favour a bigger haircut on Argentina’s debt to ensure that its own loans can also be repaid. “Paradoxically, the IMF will be the government’s best ally in the negotiations with bondholders,” said Mr Buscaglia.
But that could change. If the government does not meet its March deadline for an agreement with its debtholders, the fiscal conditions put on the government by the fund “may grow”, said Eduardo Levy Yeyati, an economist in Buenos Aires.