Argentina’s plans to restructure more than $ 100 billion in private sector debt is in disarray over the pandemic Corona virus, which threatens to plunge the country’s already faltering economy into a deeper recession.
While the crisis that hit global investment can make creditors less willing to make concessions, it may also encourage the government, analysts warn, to push toward an unacceptable deal, increasing the chances of anarchic default. But it offers an opportunity for President Alberto Fernandez’s new left-wing government to provide her with a reason to escape from the self-imposed deadline – which is widely seen as unrealistic – to reach an agreement with creditors by the end of March.
Argentina entered its third year in a row of recession, with the inflation rate reaching about 50 percent, after a currency crisis caused the economy to derail from its path in 2018, prompting the implementation of austerity measures and a $ 57 billion rescue from the International Monetary Fund.
Analysts now expect the country’s economy to shrink to 3 percent this year, forcing the government to rethink its strategy and focus on the most pressing problem of relieving the deep recession. The government announced last week a fiscal stimulus package worth about 2 percent of gross domestic product.
To date, 690 Corona Virus cases have been confirmed in Argentina, and 17 deaths. The country entered into total closure last Friday.
“It is clear that we are living in times of high degree of uncertainty, and this is something that must be taken into account,” Argentine Economy Minister Martin Guzman said Friday. “Argentina has already made massive adjustments to core financial spending. There is no way in the short term to continue this dynamic,” he added.
Meanwhile, the International Monetary Fund, which has loaned 44 billion dollars to Argentina so far, repeated a call on Friday for a “meaningful” cut to private creditors. “There is no practical way” for the state to pay off the debt in the medium term, he said.
Until very recently, Argentina’s priority was to conclude a deal with creditors as soon as possible, because negotiations were hampering progress in other government programs. But the pandemic caused her to change her accounts.
“The probabilities of defaults are greater than ever,” said Alejo Costa, strategist at BTG Bactual, a Brazilian investment bank, arguing that the political cost of defaults in Argentina was much lower than it was a few weeks ago.
He noted that the government could now justify its stricter position with creditors, given its need to direct its limited resources toward easing the current crisis. But the blow to creditors ’investments all over the world will make it difficult for them to accept a significant“ devaluation ”or devaluation of their bonds.
Costa said that Guzmán’s “categorical” rejection of high interest rates to ensure the sustainability of Argentina’s debt was “totally unrealistic” for her foreign bonds. He added that the interest rates investors have to accept on domestic re-priced debt, which amounts to about 2 per cent, are a worrying indication of what Argentina may try to secure to its external debt.
He continued, “Most investors are willing to give Argentina time, until it reaches 2023 or 2024, to find out how things are going, but there is a lot of reluctance to accept a reduction in capital.” Instead, he said, many creditors would accept prolonging the maturities and lower interest rates, which in some cases exceed 40 percent.
An international creditor warned that investors were becoming increasingly frustrated with the government’s stance, which it had had little contact with since taking office in December.
“The government still does not realize that it needs to deal with bond holders. It appears it is planning to offer to accept or reject, which will definitely be rejected (…) Then we enter into a trench warfare to try to bring the two sides together,” one of the investors said. Guzman: He invented a new way to restructure sovereign debt. But this is not the issue. “
The danger is that Argentina will return to the traumatic experience that followed the last default on major sovereign debt in 2001, when many creditors rejected the debt restructuring offer in 2005; which led to a severe legal battle with “concessionary” creditors that was not resolved until 2016. He said One of the sovereign debt experts, “The difference now is the collective memory in the market that procrastinated hunters had had enough stamina and eventually got a lot better – which is dangerous.” The government has made some progress, and restructured about $ 4 billion of peso bonds – domestic debt responsible for the bulk of the payment obligations this year – last Thursday. But it remains unclear how this will fix external debt problems.
“With all this noise (caused by the Corona virus pandemic in the markets), the government can delay for a few months the offer to pay off the debt,” said Santiago Lopez Alvaro, a partner at Delphos Investment in Buenos Aires.