Round one is over, but there’s no clear winner yet.
The first stage of a tense stand-off between Argentina and its private creditors is behind us. Officially, Argentina’s restructuring offer on more than US$66 billion of sovereign debt closed yesterday evening without receiving enough support from creditors. That means Argentina will head into the ninth default of its history on May 22, unless an agreement can be worked out in the next two weeks.
The outcome was no surprise, given that major investment funds including BlackRock, Templeton and Fidelity had repeatedly indicated this week that they would reject the offer put together by Economy Minister Martín Guzmán and his team.
Market sources told Perfil that an extremely low percentage of foreign bondholders participated in the offer, as opposed to a large number of local creditors, putting the total figure somewhere between 20 and 30 percent. A minimum of 75 percent is needed to activate collective action clauses, or CACs, which would allow for a bond swap under new conditions.
Sources close to Guzmán indicated there “will be no official information regarding the restructuring plan as the minister and his cabinet are closely evaluating every detail of the operation.” Details of the level of acceptance would be released on Saturday, other sources said.
The Financial Times reported that the level of participation was “so low that the government preferred not to announce the results in a formal communiqué.”
In recent days, Guzmán has diverted from his line that Argentina’s offer would not change, telling outlets that he is open to talks and counter-proposals.
“We value the fact that there are creditors that are entering the proposed exchange, choosing the path of a sustainable relationship,” Guzmán told local newspaper El Cronista.
“If the creditors that have still not entered have other ideas … we are prepared to consider them,” he added.
Earlier this week, in an interview with Bloomberg, the minister acknowledged the possibility of modifying his offer, as long as it remained within the bounds of what Argentina can pay.
“We are willing to consider any combination of reduction of interest, reduction of principal, extension and maturity of grace period that respects the constraints that define what is sustainable,” he said.
He also confirmed that Argentina would not budge on its deadline. “We are not planning to extend the deadline at this moment,” he said, a position backed by President Alberto Fernández.
The Economy Minister, who worked at Columbia University alongside Nobel Laureate Joseph Stiglitz, indicated Argentina is open to including a sweetener to boost creditor participation, a “value recovery instrument” akin to the GDP-warrants issued during the 2005 and 2010 restructurings.
Stiglitz, along with Nobel laureate Edmund Phelps, economist Carmen Reinhart and another 135 major experts published an article in support of Guzmán’s position this week. In “Restructuring Argentina’s private debt is essential,” the economists argued that Argentina is one of many distressed sovereigns that could collapse under the weight of its debt in the context of the coronavirus pandemic, an argument echoed by Jeff Sachs — another famous economist from Columbia University — in an article this week.
On Friday, another 174 economists – this time Argentines – signed their own letter in support of the offer. The list included former economy ministers, such as José Luis Machinea and Jorge Remes Lenicov, and Kirchnerite economist Emmanuel Alvarez Agis. In it, they highlighted Argentina's “good faith” approach to negotiations and the ample political support the plan garnered domestically.
“We believe a sustainable agreement benefits both parties: a sovereign nation with a population of 45 million currently facing difficulties and creditors themselves,” read the letter, “a responsible resolution would set a positive precedent not only for Argentina, but for the whole of the international financial system.”
Argentine assets saw generalised positive returns ahead of the deadline, indicating investors felt negotiations would continue and a positive outcome was still in the cards. The general price increases were seen throughout most of the week and spanned asset classes, from dollar-denominated bonds to stocks, both in Buenos Aires and New York.
Despite relative optimism on the restructuring front, Argentina’s multiple dollar exchange rates continue to push higher. While the official peso-dollar rate stood at 69.63 pesos by the end of the week, the informal or “blue” rate surged to a record 122 pesos, gaining 3.4 percent just this week and stretching the black market spread to more than 75 percent.
Even in the face of increased currency controls by the Fernández administration, investors in Argentina continue to find ways to convert their pesos into dollars, particularly in a context of intense monetary expansion by the Central Bank in order to finance myriad emergency measures by the government aimed at propping up an embattled economy.
While President Fernández has publicly supported Guzmán throughout the negotiations, he has the final word regarding the restructuring. Managing multiple moving parts, the president has already indicated he has every intention of avoiding a new default, but has also lent support to the hard-line position expressed by the Economy Ministry, which reportedly counts on the support of Vice-President Cristina Fernández de Kirchner.
Pressure to avoid a default, and reactivate the economy, is mounting. The Argentine Business Association (AEA) asked Fernández to “keep the productive apparatus alive” while avoiding a default. Grouping companies such as Grupo Clarín, Techint, and La Anónima, they were relatively supportive of the government’s initial response to the coronavirus, but are now suffering its economic consequences.
“Don’t be abusive,” responded Fernández, “every Argentine is paying their salaries so that once the quarantine is over they can return to production,” he added, referencing an emergency programme put in place by his government to support the private sector.