With the countdown towards May 22 under way and after evaluating Martín Guzmán’s bond swap offer, most major investment funds believe that there is margin for the economy minister to offer them some carrots, in the form of an advance payment and moderating the interest rate haircut or the grace period, potentially averting default if accepted.
After declining to pay up Wednesday, when US$500 million in payments were due, the Ministry now has until May 22 to redeem the bonds without falling into default. According to the information presented to the Securities & Exchange Commission of the United States, the offer to bondholders expires May 8, although this deadline can be extended or suspended.
According to a report by the JP Morgan investment bank, although the government has said that there is no fiscal margin to improve the terms, the window of negotiation functions as an incentive to seek that improvement. A reserved report for the investment bank’s clients again picks up the idea of an agreed ‘standstill’ permitting the suspension of interest rate payments, as in the case of Ecuador.
“This model could be used for Argentina in a scenario where the creditors recognise problems faced by the government in juggling health and economic crisis against the payment of debt,” they indicate. A four-month pause could represent a relief of US$1.7 billion for Argentina.
Another option detailed by J.P. Morgan is an advance cash payment as “the potential carrot to improve the terms of the offer,” although that might not be sufficient given the short period available for manoeuvre.
According to the bank’s calculations, Guzmán said that there are no more funds to pay but he has only used US$1.2 billion of the US$4.6 billion which the Treasury may take, according to emergency legislation approved last December.
“We cannot rule out the government asking Congress to amend the law,” they add.
Offering a growth-linked coupon as in the 2005 bond swap would not be easy to structure, indicates the report, addressing another alternative being shuffled by the market. “There are serious doubts about the growth profile,” it adds. Economic activity has fallen by more than seven percent since late 2017, JP Morgan recalls, stressing that “the government has still not specified to which areas it would assign the funds coming from debt payment relief.”
The investment bank takes as its reference the Economy Ministry presentation in the meeting with the governors last Thursday (April 16). There it spelled out that the debt payments for this year treble the Health Ministry budget in the midst of the coronavirus pandemic.
“The savings have basically been going to social spending, which is linked to a very low fiscal multiplier,” remarked the Wall Street firm.
Another impediment for a growth-linked coupon is “the quality of Argentine statistics in the past.”
Analysts warn that a sovereign default would exacerbate the economic depression stemming from Covid-19, which could limit private financing and investments, as well as adding inflationary pressures. With default Gross Domestic Product could fall up to 10 percent this year.
A report by the SBS group also highlights that “the room for improving the conditions should not be disparaged.” Argentina has the margin to raise the coupons to an average of 3.5 percent and reduce the grace period to two years (or at least capitalise interest in that period). At the same time a more homogenous structure of coupons could raise the payments in the first years, even if that requires lowering them for the longer-term coupons.