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ECONOMY | 19-10-2020 20:40

Bond rout blows up the template for debt restructuring

Investors are giving up on Argentina, just six weeks after the government pulled off a US$65-billion restructuring.

Investors are giving up on Argentina just six weeks after it pulled off a US$65-billion restructuring.

The country’s overseas bonds have plummeted more than 20 percent since early September, the world’s biggest drop in that span. Morgan Stanley calls it the worst rout in the aftermath of a restructuring in at least 20 years, and it comes despite the nation winning a whopping US$38 billion of debt relief from creditors.

Those same investors have been dismayed at what followed. While perhaps not shocking from a serial defaulter run by a leftist government that’s vowed to prioritise the needs of its people over financiers, there’s no credible long-term plan to fix the economy and return to growth. Measures so far have been half-hearted and ineffective efforts to prop up the currency and hold on to foreign reserves, nothing like the bold action most economists say is needed.

Now, the only thing preventing Argentina from defaulting again in months is that no payments of any kind are due until 2023 under the restructuring terms hashed out with investors.

“Argentina could have had a very virtuous start, and with that they would have captured much more positive investor sentiment,” said Robert Koenigsberger, the chief investment officer at Gramercy Funds Management, which holds the bonds and was active in the recent talks. “The restructuring provided the possibility for something different. What we’re witnessing thus far is no vision, no plan, and no IMF program to anchor policy expectations.”

Since the debt restructuring, Argentina has tightened restrictions to keep companies from using dollars to pay debt, raised taxes on dollar purchases for savers, increased some local interest rates and cut levies on agriculture exports. And still, the central bank is bleeding foreign reserves and profligate spending means the country is running the highest deficit in at least three decades, according to Adriana Dupita, an economist with Bloomberg Intelligence.

Economy Minister Martín Guzmán was besieged by sceptical investors in a video call October 2. with more than a dozen bondholders representing major groups in the restructuring, according to people familiar with the matter. He defended the measures as temporary necessities, assuring creditors that the country was on an upward trajectory and didn’t need a more substantial policy overhaul, the people said.

This wasn’t what investors wanted to hear after the government of the region's second-largest economy went hat-in-hand to ask for debt relief. The hope was that President Alberto Fernández would pursue a revamp to set the economy on a path toward sustainable growth, reinforced by a deal with the International Monetary Fund. So far, they’ve seen nothing of the kind.

“To restore confidence you need an implementation of macro programs that are consistent and technically well-thought out, with buy-in from politicians,” said Jorge Piedrahita, managing partner at Gear Capital Partners in New York. “I don’t see the government working in that direction. They’re just slapping on small band-aids here and there.”

Cynics might question how anyone expected anything different given how often investors have been burned in Argentina. The nation has defaulted on foreign debt nine times in the past 200 years. Three delinquencies materialised in the past 20 years as generous social spending and outsized foreign obligations solidified Argentina’s reputation as a serial defaulter.

And none of the most recent defaults resulted in major policy overhauls. While Argentina’s economy soared after a restructuring in 2005, it was mostly due to an unprecedented global commodities boom.

This time, Fernández doesn’t have a surge in soy prices to fall back on. His administration, meanwhile, is showing signs of discord just 10 months into power, further complicating the nation’s effort to agree on policies that would pull the economy out of recession.

The wish list investors have is long. At the very least, they want some sort of fix for the peso’s artificially strong official rate, a significant cut in export taxes, no more money printing, higher local interest rates, an end to nationalisation threats and a repeal of rules that make it difficult for firms to pay overseas debt.

But officials have yet to spell out a clear plan to end a recession in its third year or damp inflation exceeding 40 percent. Asked in an interview October 5 about plans to cut spending, Guzmán questioned the idea that reductions were needed or would be helpful.

The Economy Ministry’s press office didn’t reply to requests for comment.

International reserves are at a four-year low, and some analysts say net liquid reserves are now negative. A team from the IMF visited this month to work out a new payment schedule for the country’s US$44 billion of debt with the lender, and will return next month for further discussions, but fresh financing seems unlikely.

And with the bond market closed to Argentina, a sharp drop-off in tourism amid the pandemic and farmers hesitant to sell their crops abroad at the official exchange rate, there aren’t many dollars coming in. Argentina’s situation is further complicated by the turmoil in its biggest trading partner, Brazil, where concerns are mounting that a soaring budget deficit will imperil economic growth for years to come.

To some, the pessimism is overdone. They point out that if Argentina is able to quickly renegotiate its debt with the IMF and work with fund officials to create policies that set the stage for growth, the country could be on the path to normalcy.

“The restructuring granted Argentina significant cash-flow relief, and so bond prices no longer reflect uncertainty about near-term payment risks,” said Graham Stock, a strategist at Bluebay Asset Management, who participated in the talks. “They are a function of expectations for a more coherent policy setting in the medium to long term. On that basis, I believe there is more upside than downside.”

But while the lack of bond payments before 2023 mean there’s almost no chance of default before then, prices for the notes could turn even lower if the government continues to muddle through without shifting toward more orthodox policies, according to Siobhan Morden, the head of Latin America fixed income at Amherst Pierpont Securities in New York.

“It’s hard for me to be optimistic and think that they’re going to reinvent themselves,” Morden said. “They chose an inward, isolationist model.”

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by Scott Squires, Bloomberg

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