Editorials are generally too self-important to deal with anecdotes but we will make an exception today. Not that we agree that yesterday’s refusal to pay Global bond interest to the tune of US$503 million is an anecdote, as defined by Economy Minister Martín Guzmán on Tuesday, nor even the subsequent official label of “soft default.” Not the end of the world or even negotiations with creditors but only if and when the latter conclude successfully will Guzmán be entitled to speak of anecdotes. Just as the public debate on the proposed 5,000-peso banknote centres unduly on the faces adorning the bill rather than the root issues of inflation and the runaway printing of money, so there is too much attention to the semantics of debt. Perhaps a term like selective or strategic but not soft, would be the most accurate rather than the single D-word because yesterday’s moment of truth was just a moment, serious but also relative – time to look ahead to the new deadlines looming next month (with the government’s bond swap offer extended to June 2 and cross-default on June 22).
It is still well worth asking why it has come to this. The government’s debt strategy of pressing for a settlement in the midst of the coronavirus pandemic baffles any conventional wisdom. In a normal world (gone forever, according to Buenos Aires Province Governor Axel Kicillof) everything would point to a standstill arrangement similar to Ecuador whereby all interest payments and creditor claims are suspended for perhaps the rest of the year until the pandemic subsides and debt can be renegotiated on a more reasonable basis – as it is, talks trading figures to two places of decimals seem totally surrealistic in the current context. A down payment of that US$503 million – which, by the way, would have averted any technical default yesterday – might also have served to guarantee good faith for a lengthy standstill interest-free arrangement.
But the government has ruled out that option on the grounds that Argentina cannot stand months of uncertainty and volatile money markets. There is certainly plenty of truth in that but the Frente de Todos administration seems basically convinced that the pandemic is the best rather than the worst time to negotiate, dramatising Argentina’s inability to pay and thus justifying a debt holiday for the entire Alberto Fernández presidency – a hidden agenda behind overacting quarantine. That hidden agenda could run deeper in an administration including strongly anti-capitalist elements, as witnessed by this week’s bill by Kirchnerite deputy Fernanda Vallejos, whereby all companies receiving state assistance return it with shares (a classic case of acting as judge and jury, since the state first bans economic activity and then benefits from the fallout).
If applied to the negotiations with creditors, the logic of the Vallejos bill is to revive debt-equity swaps – if insolvent companies are to be obliged to hand over shares to the state in exchange for aid, why should Argentina’s creditors not have the right to demand equity (in the public sector at least) if they are not repaid? It remains to be seen if bondholders will be interested in shares in Aerolíneas Argentinas etc.. But more seriously, maximising lockdown to play the hardball of soft default (and possibly also crush the private sector forever) remains a dangerous game jeopardising the entire socio-economic fabric – when President Fernández repeatedly says: “I’d rather have 10 percent more poverty than 100,000 dead,” perhaps he should be reminded of another phrase: “Be careful what you wish for...”
Following yesterday’s decision (or lack thereof), intense negotiations lie ahead. There are definite grounds for optimism, especially since both sides have far more to lose than to gain from their failure. That was clearly demonstrated in midweek when the most important of the three bondholder groups (BlackRock, Fidelity, Ashmore et al) recommended notching down their counter-offer several percent to converge with the most beneficial. Yet the creditors host a multitude of interests – it is one thing to give ground when holding bonds from the Mauricio Macri presidency, averaging an increasingly unreal seven percent, and another with 2005 and 2010 debt swap bonds already suffering a 70 percent haircut and then to be asked for another 60-70 percent scalping. The devil lies in several details beyond only exit yield – the length of grace period, the capitalisation of unpaid interest, limiting haircuts to interest not capital payments, etc.
“From here to eternity” or merely “to be continued”?