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OPINION AND ANALYSIS | 12-05-2020 09:17

Mohamed A. El-Erian: Argentina gives debt negotiation another chance

The change in the government stance kicks the ball back to the creditors, raising two dynamics that may be best viewed through a game-theory lens.

In an attempt to avoid a disorderly default, Argentina’s government during the weekend both extended the period for negotiations with bond creditors and signalled a willingness to consider a counter-proposal for what many viewed earlier as a take-it-or-leave-it offer. The change in the government stance kicks the ball back to the creditors, raising two dynamics that may be best viewed through a game-theory lens.

Going into the weekend, the creditors had self-organised into three groups, with some staying out of all three. Having initially gone their own ways, the three groups came together a week ago to issue a joint statement rejecting the Argentine offer. That suggested the country had mustered too few creditors willing to accept its terms. Facing a disorderly default, the government decided to signal greater negotiating flexibility, extending the deadline on its debt offer to May 22.

During the weekend, after meeting with his economy minister leading the negotiation, President Alberto Fernández tweeted: “We continue to dialogue in good faith with creditors with the aim of reaching a sustainable agreement.”   

Going from defence to more offence, creditors as a whole may now face a tight deadline to consider the pros and cons of two approaches to the negotiations.

Under the first approach, a majority of creditors would come together and approach Argentina with a common counter-proposal. This increases the probability of upfront creditor unity but may need more time to execute than Argentina is making available. The other approach would involve a critical mass of creditors going forward with a proposal, pursuing constructive negotiations with Argentina while also working on bringing a bigger group of creditors on board.

A second dynamic becomes obvious if you consider the bigger negotiating “game” — namely, the presence of a third significant player which, so far, has essentially been on the sideline.

In estimating the net present value of proposals to change contractual terms, creditors are also implicitly taking a view on the future role of the International Monetary Fund, a traditional “senior creditor” that has US$44 billion outstanding in debt claims on Argentina. Again in game-theory terms, the Argentine preferred terms, particularly minimal interest payments in the short term and no principal guarantees, gives the IMF a free option in the sense that it retains considerable flexibility on whether and how to de facto refinance Argentina payments due in the next few years. 

It is hard, if not impossible, to predict with any precision how these two game-theory dynamics will evolve in the next 10 days or so. This may be the reason for the markets’ relatively muted reaction on Monday to Argentina’s softened stance. And it imposes an intriguing question for the government: Given that it is interested in avoiding a disorderly default, should it contribute to more pro-active approaches to in resolving the uncertainties? 

(Full disclosure: I am an adviser to Gramercy, which holds Argentine debt, and I’m a member of the IMF’s external advisory group.)

by Mohamed A. El-Erian, Bloomberg

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