Buenos Aires’s capitulation has been a boon for sovereign bonds.
Sovereign notes have returned 8.7 percent – by far the world’s best performance – since January 27, when the cash-strapped province first offered a sweetener if holders agreed to accept a delay to a key bond payment.
The rally accelerated last week after Buenos Aires gave up on the proposal, agreeing to fork over the full US$250 million it owed after failing to receive enough support from investors.
Provincial officials had insisted just days earlier that there was no way they could make the payment, and creditors took the about-face as a sign that the province’s allies in the federal government don’t want a hard default and will work for a negotiated settlement as they seek debt relief.
To be sure, Argentina’s billions of dollars worth of overseas bonds are still deep in distressed territory near 50 cents on the dollar, but the notes have rallied 26 percent since bottoming out in November.
“To default on the province debt would have been an incredibly stupid decision,” pointed Joaquin Almeyra, a fixed-income trader at Bulltick LLC in Miami.
“Argentina was trying to make a move in order to get ready for bondholder negotiations on the sovereign debt, but it didn’t go well. They’re now in a difficult spot because with the province, they basically showed their hand,” he added.
Sovereign securities also got a lift at the end of last week from a report in Clarín newspaper that the International Monetary Fund (IMF) will endorse a plan to offer creditors a 15 percent haircut and three- to four-year extension on bond maturities.
The Economy Ministry’s press office and an IMF spokesman declined to comment.
The IMF’s approval is seen as key to the upcoming restructuring.
The country boosted the size of a record credit line with the lender to US$56 billion in October 2018 amid a currency crisis that’s turned into an economic slump.
The peso has dropped another 25 percent since a primary election in August 2019 signaled a less investor-friendly government was likely to take over, sparking the crisis that’s resulted in the restructuring push.
Economy Minister Martín Guzmán proclaimed last week he and IMF Managing Director Kristalina Georgieva were cooperating to resolve the debt crisis, and that the government is using foreign reserves to make interest payments.
He’ll appear in congress to present an analysis of the nation’s debt sustainability on February 12, the same day that an IMF mission will arrive in Buenos Aires to meet local officials.
“If what happened with the province of Buenos Aires allowed prices to grind higher, the backing of the IMF will cause prices to jump by a much larger order of magnitude,” said Ray Zucaro, Chief Investment Officer at RVX Investment Management in Aventura, Florida.
“Often the market thinks that Argentina is walking into a default, like they’re going to default on their way to work in between stopping at Starbucks and grabbing the dry cleaning,” he concluded.