In the midst of a global economic slowdown sparked by the coronavirus pandemic, Argentina faces its own debt crisis as it seeks to avert its ninth sovereign default. The omens are not looking good and the countdown is on.
Economy Minister Martín Guzmán unveiled his formal restructuring offer to private creditors last week, followed this week by Buenos Aires Province, led by Governor Axel Kicillof. Major bondholders immediately rejected Guzmán’s offer, and were quick to call Kicillof’s offer even worse, kicking off a tough period of negotiations.
On Wednesday, raising the stakes even higher, Argentina confirmed it had missed a debt service payment of some US$500 million, triggering a 30-day countdown towards default.
After announcing his long awaited offer, Guzmán rallied provincial Economy Ministers in a teleconference meeting on Thursday where he asked for coordination and collaboration on both national and provincial debt issues.
“We are united under a single banner that is to defend the interests of our federal republic by putting an end to unsustainable debts,” the Economy Minister tweeted after the meeting.
Guzmán was joined by Internal Minister Wado de Pedro, Economy Secretary Raúl Rigo, Provincial Secretary Silvina Batakis, and Finance Secretary Diego Bastourre.
During the meeting, provincial Economy Ministers complained about being barred from taking on debt, or emitting so-called “quasi-monies” in order to finance their response to the coronavirus outbreak in a context of stalled activity and tanking tax revenue. A special 136-billion-peso fund was instituted by the Executive Branch in order to aid provinces, 20 billion pesos of which has already been distributed.
BUENOS AIRES PROVINCE
By and large the most troubled province is Buenos Aires, which unveiled plans to restructure US$7 billion worth of foreign debt this week. Kicillof’s plan was aligned with the national restructuring offer, requesting a three-year moratorium and a gradual increase in interest payments from 1.97 percent and averaging 4.56 percent in dollars and 2.94 percent in euros.
The proposal, released late Thursday, asked investors for a three-year payment moratorium and a steep cut to interest rates. It asked bondholders to swap 11 bonds for four dollar and euro bonds maturing in 2032 and 2040. The first coupon payment is March 2023. While the new bonds pay amortising principal payments, no principal will be returned before 2026.
Market participants and analysts were quick to respond to Kicillof in strong terms. “If the experience of the federal government is of any guidance, the odds that a large share of investors reject the initial offer is meaningful,” wrote Alberto Ramos, head of Latin American economics at Goldman Sachs Group Inc. “The long grace period, low coupons, and deferred payment schedule of the new bonds are unlikely to persuade many bondholders.”
Compared with a national plan that was also roundly panned, the Buenos Aires Province government's offer is “a more egregious unwillingness to pay for a credit that cannot convincingly argue that it needs substantial debt relief from bondholders.” said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities. “The province’s offer was completely opportunistic, and will be promptly rejected.”
CLOCK IS TICKING
Wednesday marked the real beginning of Argentina’s tumultuous path toward a potential new default, as the Economy Ministry confirmed it skipped payment on US$500 million debt service.
That could only be avoided should the government and bondholders reach a deal on restructuring its massive foreign debt, a state of affairs that at present looks unlikely.
Argentina will invoke the standard grace period for securities maturing in 2021, 2026 and 2046, the Ministry said in a statement. If the interest remains unpaid or a restructuring agreement is not reached before May 22, when the grace period expires, the bonds will be considered in default.
The Ministry said Argentina would use the period to seek creditor acceptance of its proposal, which it has said will remain in force until May 8 and aims at "restoring the sustainability of public debt in foreign currency."
Argentina’s offer, first unveiled last Friday, would halt payments on about US$66 billion of foreign debt until 2023 and cut interest rates. Bondholders would exchange their securities for new ones with interest rates that start at zero and gradually increase, creating an average rate of 2.33 percent – well below what’s typical for emerging-market debt. The haircut on principal is relatively small at just US$3.6 billion, while the cut on interest obligations totals US$37.9 billion.
Argentina’s three major creditor groups have already rejected the initial proposal. One called the plan “unacceptable,” while another said the plan put a “disproportionate share” of the nation's adjustment efforts on the shoulders of international bondholders. The groups didn’t give specifics of where the offer fell short or what they’d like instead.
The early criticism signals a difficult road ahead as Argentina seeks a deal with creditors, some of whom loaned billions of dollars to the country just a few years ago when the Mauricio Macri administration was in power.