Argentina has defaulted for the ninth time in its history, just four years after returning to capital markets on a wave of optimism. Now, under a different president and amid a very different context, the government is extending the deadline for crucial debt restructuring talks, with creditors seeking every dollar they can.
Friday’s default, Argentina’s second this century, was widely expected after the Economic Ministry announced on Thursday that it was postponing talks for a second time with international creditors on restructuring US$66 billion of its debt, this time until June 2.
With US$500 million in interest payments due, Argentina’s Ambassador to the United States Jorge Argüello published a letter saying the government wouldn’t pay up until a new agreement is reached with creditors.
The Alberto Fernandez administration is continuing to negotiate a restructure with creditors, government officials confirmed.
"We're not paying but the negotiations are continuing," a Casa Rosada source told AFP.
Officials are optimistic, despite criticism from creditors who say Argentina is doing enough. A source close to the talks told Reuters yesterday that the two sides could reach a comprehensive deal in a “matter of days, not months.”
After five months in office grappling with a two-year recession, 50 percent inflation and a crash in the unofficial peso rate, President Fernández is trying to strike a deal with bondholders before Argentina suffers the full effect of default.
The country currently owes around US$324 billion, amounting to around 90 percent of its GDP, according to AFP, and is seeking to restructure just over a fifth of that.
Negotiations over debt restructuring had started before the arrival of the coronavirus pandemic. Economy Minister Martín Guzmán has taken an aggressive stance on debt, in part driven by a need to free up resources to fight Covid-19’s impact.
Argentina’s economy will contract by around seven percent this year, according to the most recent Central Bank survey.
'Nothing of substance'
Argentina's main group of creditors reacted to the news by saying it was seeking "a direct and immediate discussion" of the government’s plans. The Ad Hoc Bondholder Group – which includes money managers like Ashmore, BlackRock and AllianceBernstein – issued a statement drenched in criticism.
“The group welcomes Argentina’s expression of an intent to work with creditors, but actions speak louder than words. Over the last month, Argentina has had virtually no substantive engagement with its creditors,” said the group, which holds more than US$16 billion in international bonds, according to Reuters.
Another of the main creditor groups, the Argentina Creditor Committee, also said it did not approve of the move.
“This latest default, if not promptly resolved, will prevent access to the international capital markets needed for the recovery of the Argentine economy and therefore will be detrimental to the Argentine people,” it said in a statement.
Economy Minister Martín Guzmán, who has been accused by some creditors of being too hostile in talks, said early this week that a deal would only be successful if it didn’t “mortgage” Argentina’s future.
"Success is not an agreement that mortgages the future or leaves Argentines hostage to a problem," Guzmán told the Cenital website.
Argentina asked bondholders for a three-year grace period on debt repayment, a 62 percent reduction on interest amounting to US$37.9 billion, and 5.4 percent on capital – or US$3.6 billion. That was rejected with a counter-offer that the government says it is studying.
“It’s a very important deadline, no doubt, and there’s a risk going beyond that,” said Héctor Torres, a former IMF executive board member who represented Argentina and other nations.
Nevertheless, talks are still ongoing. On Friday, reports suggested the two sides were both seeking to calm the situation and reach a deal. Creditors have indicated they don’t intend to litigate right away.
Iit’s unlikely that creditors will immediately seek the repayment of all their bonds, a process commonly known as acceleration, Mark Walker, a debt restructuring expert at Guggenheim Securities, said in a Wilson Center webcast Thursday.
President Fernández said Thursday that he wants to reach an “honourable” deal, without leaving the country saddled with unpayable debts.
"If the majority agrees to the exchange, the default will be very short. I don't think there will be a reduction in the letters of credit" that would impede essential imports, economist Marina Dal Poggetto from EcoGo told AFP. "But if negotiations take a long time, we'll pay dearly."
The International Monetary Fund, which is supporting Argentina in its restructuring plan, says it has been encouraged by the "willingness of both sides to continue discussions to reach a deal," spokesman Gerry Rice said.
But analysts Capital Economics said "there is a growing risk that the restructuring talks drag on into next year."
Yet more bond interest payments are due at the end of June, which could be delayed by a month.
But if by then there is no restructure agreement, "bondholders will probably consider it more convenient to litigate given they think it unlikely that Argentina will be able to reach a short-term agreement," Ignacio Labaqui of Medley Global Advisors told AFP.
If bondholders take Argentina to court in the United States, it would be "a waterfall of bad news for the country," said Sebastian Maril, from the Fin.Guru consultancy.
Now that Argentina has defaulted, it also runs the risk of its debt being bought at a cut-price deal by speculative funds that could then choose to pursue much bigger rewards through litigation.
Such funds, commonly as "vultures" locally, already did so successfully in the New York courts in 2014.