Debt, deadlines and default: Argentina’s last-ditch push for US$65b deal

A vendor wearing a protective face mask waits for costumers at her greengrocery, as the spread of the coronavirus disease continues, in Buenos Aires May 6, 2020. — Reuters pic
A vendor wearing a protective face mask waits for costumers at her greengrocery, as the spread of the coronavirus disease continues, in Buenos Aires May 6, 2020. — Reuters pic

BUENOS AIRES, May 8 — Argentina and its international creditors are racing to find middle-ground over a US$65 billion (RM281 billion) debt restructuring, with sources close to the government indicating it may be willing to be flexible to break a deadlock that risks triggering a default.

The talks face a first key deadline today and a harder cutoff on May 22 when the country could enter default, as a grace period for US$500 million of interest payments comes to an end.

There’s unlikely, however, to be a clean-cut result soon.

Argentina is at loggerheads with its creditors over its proposal to impose large reductions on coupons on a range of debt, a three-year payment hiatus, and to push back maturities into the next decade.

With the economy already struggling to escape a painful recession before the coronavirus pandemic hit, Argentine negotiators want to avoid what would be its ninth default. Such an outcome would damage access to global finance, with investors already wary after decades of volatility.

“We are hopeful and we will keep moving forward... It’s a longer process than deadlines,” said a person close to Argentina’s discussions with its international creditors, who declined to be named as the talks are private.

The person said Argentina’s government may accept tenders made on the offer today even if the number of tenders is low, and then continue dialogue with those debt holders who rejected the offer, trying to “eat one dinosaur a day.”

“Even if tomorrow comes and we have a good acceptance it’s not the end of anything either,” he said, adding the deadlines were just milestones in a process that was “tedious at moments, stressful at times.”

Argentina’s economy ministry declined to comment.

The ministry has said some bondholders have accepted its proposal, though three major creditor groups have publicly rejected it, with one calling it “stillborn.” Government officials have said Argentina cannot pay more.

Argentine Economy Minister Martin Guzman told Reuters this week that the country was working with bondholders to close the gap between the two sides, even if the deal was not proving an easy sell.

Guzman said there was wiggle room if a proposal fitted with the government’s debt sustainability analysis.

Most expect that talks will go well beyond the end of this week and likely pass the May 22 deadline, the trip wire for a foreign debt default.

That could have a knock-on effect on Argentina’s already fragile markets, though bonds themselves are already at default levels of around 20-35 cents on the dollar.

“They will have to change the deadline. Then they’ll say let’s talk some more with a little bit more money on the table,” said one international creditor, who holds bonds involved in the restructuring.

Another bondholder in one of the three main creditor committees said the current standoff was a “bit of show” and that while negotiations would be protracted he was confident of an eventual deal.

“We will go through several iterations of negotiations but I think it can be done within a year,” he said, adding that Argentine President Alberto Fernandez was “pragmatic” and wanted to get investments and the stalled economy going once more.

Debt moratorium

Some investors suggested longer than a year would be needed.

The current offer includes a 62 per cent reduction in coupon payments. Analysts have calculated a net present value of around 30-35 cents on the dollar at a 12 per cent exit yield.

“I don’t understand why Argentina is in such a rush,” said another creditor, asking not to be named, adding that the country could call for a debt moratorium till the end of the year to give it more time to “work out a well thought-through proposal.”

“Later in the year there will be more clarity on the impact of the coronavirus and on the state of the economy in general, (which is) of vital importance for any debt sustainability analysis,” he said.

Capital Economics said in a note yesterday the gap between the government and creditors seemed so large that “unless both sides thrash out something quickly, talks could get bogged down and take years to conclude.”

“This deal apparently expires on Friday but it already looks dead.”

Value recovery mechanism

However, there have been signs of a thawing in hard-held positions, helping push up bonds slightly in the last few days.

“It is our intention to reach a common agreement with our creditors,” Guzman said in an online seminar on Wednesday, adding the country would be “flexible.”

An updated debt restructuring framework from the economy ministry also included the possibility of a “value recovery mechanism” that could raise coupon payments or accelerate maturities if growth and access to markets outperformed.

The person with knowledge of the talks said that adding this sort of mechanism had support from Argentine officials, though many creditors were still more focused on coupons.

The ministry also shared this week a counter offer from major creditor BlackRock, which suggested “zero haircut” and pushing back maturities by around four years, a proposal the ministry described as “fundamentally incompatible” with its economic analysis.

BlackRock declined to comment.

The government has slashed its economic outlook for 2020 to a contraction of 6.5 per cent.

“Now we are in a situation in which the primary fiscal deficit will be substantially larger than what we expected before Covid-19,” Guzman told Reuters.

Jeffrey Sachs, a Columbia University economist who has called for creditors to play a more constructive role in talks, said Argentina did not want to default, but that the country may not have a choice if investors didn’t play ball.

“Argentina does not want a default, it wants simply a refinancing,” he said.

Missing the May 22 payment could trigger a domino effect, he added. “If it happens, it will be a sign that it will probably happen repeatedly in the coming months.” — Reuters

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