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Sovereign debt restructuring: Argentina

This week, Argentina reached an agreement with creditors for a restructuring of $65bn in foreign bonds. This grants significant debt relief to Latin America’s third largest economy, allowing Argentina to focus on economic recovery, necessary even before the economic impact of COVID-19, and taming excessively high levels of inflation. This is the second debt breakthrough for a South American nation in a matter of days, with Ecuador agreeing on a $17.4bn restructuring of international debt on Monday.

Key details

This debt relief comes after more than 6 months of negotiations with creditor groups and Argentina’s second default since 2000 on May 22nd of this year. The restructuring of Argentina’s sovereign debt is unique in that three of the largest creditor groups, each with vastly different mandates, have banded together in negotiations to agree on a joint proposal which replaces the old defaulted debt with new bonds. These creditors include BlackRock, Fidelity Investments, and Ashmore Group Plc, and claim to hold more than a third of total outstanding sovereign bonds issued since 2016. The restructuring results in adjusting payment dates without increasing the aggregate principal payments or the interest (coupon) payments. This increases the value of the proposal for creditors as some interest and capital payments will be made sooner than expected on new exchange bonds. The restructuring agreement is believed to have a recovery value of around 55 cents on the dollar. This comes after lengthy negotiations between creditors, who requested 60 cents on the dollar, and the Argentine government, who initially offered around 40 cents on the dollar.

Why now?

Argentina’s response to COVID-19 has been to impose strict lockdown measures, with poor living standards meaning cases have failed to diminish in certain regions. These tougher restrictions to combat the public health crisis will provide further problems to an already struggling economy. Bank of America analysts estimate this will ultimately lead to a 13.5% decline in Argentina’s GDP, while Argentine central bankers suggest a figure closer to 12%. This will worsen the decline of Argentina’s economy, currently suffering from three consecutive years of negative GDP growth and a significant debt burden of 93% of GDP. The inability of businesses to open has brought about a liquidity and cash flow crisis in August and this follows blows to business confidence in the region, with Latnam, the largest airline company in Argentina, pulling out of the country. As Argentina struggles to control its escalating levels of debt, the Argentinian peso has lost more than half of its value in just a few years, with dollar-denominated sovereign debt and little foreign exchange reserves only exacerbating the debt crisis that Argentina faces. This worsening economic outlook is likely to have hastened recent negotiations with creditor groups due to the greater risk of future default by Argentina. The fact that most hard currency debt is benchmarked off the sovereign would mean a prolonged standoff between the debtor and creditor groups would significantly increase the financing costs of growing businesses. The timing of the restructuring agreement is to break the bleak cycle that Argentina currently finds itself in. This is the first step towards providing stability in Argentina and redirecting focus, in the short-term at least, to countering the deep recession and one of the highest inflation rates in the world at around 45%.

2001 default

The 2001 sovereign debt default is a significant factor in the government’s response to the 2020 default. The lack of concessions made by previous governments act as a warning to the current left-wing government. The lessons of history provide a stark reminder to the current government to consider appeasing bondholders and finding common ground to avoid lengthy court battles and the deep social and economic crisis which followed the 2001 default. The long-standing dispute with a group of holdout bondholders in 2001 resulted in a 15-year exclusion from global capital markets. The concessions made by the current government should allow Argentina to shift its immediate focus from paying off an unsustainable debt burden to policies for economic recovery. Argentine President Alberto Fernandez said on Tuesday that “this gives Argentina the autonomy to decide what country we want” with a clear focus on developing production capacity and providing jobs without having to impose severe austerity measures that would arise from another exclusion from global capital markets.

Looking forward

To finalise the debt restructuring agreement, the Argentine government must meet a minimum threshold of 75% of bondholders but it is said to be unlikely that bondholders will veto the recent agreement as it has generated enough support, despite objections by holdout investors. The country is now set to enter talks with the IMF, its largest single creditor from whom it has borrowed $44bn since the 2018 currency crisis, in a bid to delay debt payments falling due in 2021-23. This is again an effort to avoid imposing harsh austerity measures when trying to tackle the country’s economic problems. The IMF bailout package was agreed at an annual rate of 4.5%. A reduction of 1 percentage point would result in an average monthly saving of $250m over 10 years for the sovereign. The current Argentine government has demonstrated a willingness to modify terms and conditions so negotiations with the IMF could also evolve into a lengthy process, with Argentina looking to restructure more of its sovereign debt. The aim for Fernandez and Argentina is to accomplish what his predecessor Mauricio Macri could not — to generate economic growth and stability in order to control what is currently an unsustainable debt load. By restructuring their public debt, Argentina can now implement fiscal and monetary policies to recover from the current crisis it finds itself in. Argentina’s economic recovery will thus depend on the effectiveness of these future policies.

Sources

https://www.ft.com/content/ecb81529-7853-4403-95a9-577ee1ebc4b8

https://www.ft.com/content/9c01ba4c-f4eb-4bab-88cb-a671e65cfa6b

https://www.ft.com/content/0ce01518-4b67-4a7d-b435-93386f7ea874

https://www.ft.com/content/737b48bc-c1c9-11e8-95b1-d36dfef1b89a

https://ftalphaville.ft.com/2020/07/31/1596206270000/Argentina-s-debt-dance–a-pivot-to-the-IMF–/

https://www.bloomberg.com/news/articles/2020-08-04/argentina-reaches-65-billion-restructuring-deal-after-default

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