Face It, Argentina’s ‘Delay’ Is Next Step To Insolvency

Forbes– Argentina can’t pay its bills. A hard default is coming. Sorry Century Bond holders. It was good while it lasted.

Once the new government of Alberto Fernandez and Cristina Kirchner came in, the writing was on the wall for anyone who wanted to read it. The Kirchner leadership that still dominates official politics in Buenos Aires will prove once again why lending money to Argentina is — well — a bad idea. Getting an Argentina bond trade right is a matter of early in, and early out.

The economy is in a recession again. It survives on dollars. Everything about Argentina’s core business, from the commodities trade to wine country and Patagonia tourism to its entire real estate market is done in dollars. No one wants the peso. The poor have it. They can’t afford dollars. And as the economy goes nowhere, they increasingly depend on the government for food.

Meanwhile, its central bank is burning through reserves and has maybe $12 billion to its name. Worth noting: failed state Venezuela defaulted on its sovereign and PdVSA oil bonds once it hit $10 billion in cash reserves.

Now that Argentina has discovered the coronavirus, it will use that public health emergency, which Fernandez declared last week, to convince the world that it needs to spend money on public health initiatives to prepare for the worst. Does it make sense? Yes. Should Argentina be trusted? No.

The country is basically insolvent.

They’re in what’s now called a “restricted default” in the credit watchdog world. Fitch Ratings put them there last night.

The decree to suspend payment issued on Monday postpones payments on foreign-currency bonds due for the rest of the year until December 31, 2020.

How Argentina somehow comes into money between now and then remains a total mystery, unless they somehow avoid the global recession, now expected on account of the pandemic.

The affected bonds include both long-term dollar-denominated bonds as well as short-term dollar-denominated Treasury notes called LETES that had been previously rescheduled for payment on August 31. That’s been defaulted on yet again, or “delayed.”

Kirchner fans in Argentina will love the fact that she and her president have stuck it to bond lords yet again, but at this point, who needs Argentina? Sure, you can get double digit yield. You can lend them $1 million for two years, and get paid $200,000 a year in interest. But when the principal is due, you would have received $400,000 total in two years’ worth of interest payments, and lost $600,000 in the principal they’re not paying. Meaning, you got nothing in yield at all.

Argentina’s local currency debt is also rated in “restricted default” by Fitch. The authorities there have continued with a strategy of swapping out peso-denominated debt on terms that Fitch considers a deserving of a distressed asset classification.

Why this country is in the MSCI Emerging Markets Index is beyond the pale.

Monday’s rating action taken after market hours by Fitch reflects a pending default in Argentina. The country has defaulted on its debt repeatedly in the past, for extended periods, with the last few times being under Kirchner administrations.