After months of often difficult negotiations, Argentina made a new offer to creditors Sunday that stands a solid chance of anchoring one of the largest sovereign debt restructurings in the history of emerging markets. By potentially lifting a big cloud hanging over the country’s ability to grow solidly and inclusively — directly for the government’s finances and indirectly by improving prospects for private sector activity — such an orderly and collaborative resolution could help overcome long-standing economic challenges that have recently been worsened by Covid-19.
The proposal would open the way for agreement with the International Monetary Fund, which has played a crucial role in providing Argentina with valuable technical analysis and third-party validation for the negotiations. Add to this the potential for beneficial “demonstration effects” for other emerging market cases, and the outcome may be a win all around, in sharp contrast to the aftermath of the country’s last major debt restructuring.
Inheriting a troublesome situation in December, the newly elected government of President Alberto Fernández embarked on negotiations with creditors. The aim was a restructured stock of debt and re-profiled service payments consistent with attaining Argentina’s elusive goal of growing rapidly and inclusively enough to lift citizens out of poverty, unleash the economy’s enormous human and resource potential, and stop what has been a depressing multi-decade fall in international economic standing.
The process has been far from smooth, reflecting the inherent structural complications, as well as self-inflicted difficulties. The government has had to deal with multiple creditor groups that lack natural cohesion, making the negotiations tricky and time-consuming. Conditions on the ground were shifting as the global Covid-19 outbreak posed a direct threat to lives and required more resources to be devoted to health care. The pandemic also had multiple negative spillover effects from the rest of the world, including lower export demand and commodity prices, less tourism, and, initially, very unstable global capital markets. Further complications arose from a premature offer in April and the inevitably noisy internal political discourse.
Having said that, perseverance by the government and the constructive engagement of a subset of creditors, together with timely technical assistance by the IMF, has now opened the way to the possibility of lasting debt sustainability — a judgment that has been independently reached by Argentina, the IMF and several creditors. What has finally emerged has the potential of being a notable win, and not just for Argentina and its backers.
According to calculations by Gramercy Fund Management LLC, Argentina would secure a considerable reduction in its contractual debt servicing obligations, providing around US$40 billion of cash flow relief over the first 10 years, equivalent to some nine percent of gross domestic product. With a five-year window of no amortisation payments and an average coupon rate of under two percent, Argentina would receive valuable time to re-allocate resources in support of structural reforms, social sector spending and poverty relief. (Full disclosure: I am an adviser to Gramercy, which holds Argentine debt, and also a member of the IMF’s external advisory group.)
In exchange for agreeing to give up some contractual claims, creditors would be in an improved position to get paid on the new terms, with those joining by the scheduled early August close getting an “early bird” incentive. They’d avoid the type of disorderly default that would devastate asset prices, force disruptive portfolio liquidations and, for those maintaining their bonds, undermine the future recovery value by delaying Argentina’s ability to grow. Indeed, creditors need only compare the potential net present value of the Argentine offer (around 53.5 cents on the dollar at a 10 percent exit yield) to the outcome of the messy 2005 restructuring (of 35 for the first group of participants and, five protracted years later, 45 for the second group, who missed on the interim payments). This assumes added importance as the immediate challenge is to mobilise sufficient creditor support for the Argentine offer.
The proposal is likely to be welcomed beyond the country and its creditors. It confirms that Argentina and the IMF, often at loggerheads in the past, can engage in mutually supportive technical interactions that help establish a foundation of trust — all helping to form a more constructive context for what a growing number of economists and analysts expect to be a rising likelihood of sovereign debt restructurings in some other emerging economies.
The compromise that has emerged from months of difficult negotiations warrants support by both Argentina and its creditors. Yes, it’s less than what either side initially put forward. But it would be in neither’s long-term interest to allow the theoretical best to be the enemy of the attainable good. What is now on the table is so much better than an alternative that, in all probability, would entail significantly more pain all around, with a particularly big hit for the most vulnerable segments of Argentine society.
by Mohamed A. El-Erian, Bloomberg