Argentina is expert at buying itself time to pay off debt that’s coming due, and on Thursday it plans to use its hard-earned skills to delay bond repayments until after a presidential election.
The second-largest economy in South America has an estimated US$37 billion of local bonds maturing in the second quarter, and it’s looking to swap as many of them as possible into new debt maturing 2024 and 2025. Securities that aren’t exchanged will have to be refinanced when the country auctions new bonds, which could be expensive and difficult soon before a presidential election in October whose outcome is uncertain.
Even if Argentina does successfully swap enough bonds, it has a US$174 billion mountain of local debt to manage. That pile is growing almost exponentially because so many of its obligations are linked to inflation, which is running at around 100 percent. Economists from Argentina’s main opposition coalition have complained that the government’s debt exchange plan only delays the pain that’s coming for whoever is president after the next election.
It’s also not clear how voluntary this swap is for many parties. The public sector, including public banks and the state-run pension fund ANSES, hold about half the nation’s local bonds due this quarter and will be forced to swap. And private sector banks, which are regulated under state law, must enter a portion of their holdings in the swap. A spokesperson for the Economy Ministry didn’t respond to a request for comment.
On Thursday, the country expects 55 percent to 70 percent of holders of local debt to exchange their bonds. A similar swap earlier this year, when the nation extended maturities on 2.89 trillion pesos (US$16.2 billion) of notes, was deemed a “selective default” by S&P Global Ratings. Soon after that, S&P raised the local currency debt rating to CCC-. S&P and Fitch Ratings Inc. declined to comment. A representative for Moody’s Investors Service didn’t respond to a request for comment.
A failed swap risks a mass exodus from Argentina’s local debt in coming months, forcing the government to print money to cover its obligations and pushing inflation even higher. But President Alberto Fernández’s administration says a successful exchange will show that Argentina can keep its debt obligations under control.
“We want to leave behind the idea that Argentina is always weeks away from a default,” Economy Minister Sergio Massa said on Monday. “This will allow us to clear up any uncertainty for 2023.”
If more investors enter the swap than the expected 55 to percent 70 percent participation rate, Argentina will need to print far fewer pesos to pay for any maturing debt that can’t be rolled over, which will allow the Treasury to continue issuing bonds that mature in the coming months, according to local brokerage Portfolio Personal Inversiones. The firm estimates second quarter maturities for local debt at around $7.4 trillion pesos (US$36.9 billion).
Argentina has a long history of restructuring debt, and reneging on promises to bondholders. It has defaulted on foreign bonds three times since the turn of the century, most recently in a 2020 restructuring deal that gave investors about 55 cents on the dollar. It isn’t selling foreign debt now, but the international securities it has sold previously now trade for around 30 cents on the dollar.
“With expected participation around 65 percent to 70 percent, it should be good enough for a swap, but not enough to eliminate risks,” said Alejo Costa, chief Argentina strategist at BTG Pactual in Buenos Aires. “As for a potential restructuring in the future, anyone would try to avoid it at first, but you never know.”
To goad investors into swapping, Argentina will offer investors the right to sell their debt back to the nation, potentially at a discount, known as a put option, on the securities they swap into. Investors will be allowed to swap into either or both of two baskets of bonds, the first with two consumer-price-index-linked bonds maturing in 2024 and 2025. The second option includes the first two inflation-linked bonds, as well as a dual bond that pays out the higher yield among a dollar-linked rate or a CPI-linked rate.
Some local investors like Adcap Asset Management’s Paula Gandara are sceptical the exchange will fully assuage the market’s concerns.
“But anything that aims to improve sentiment and the smooth functioning of the market is welcome,” Gandara said.
by Scott Squires, Bloomberg