The Argentine Republic is days away from defaulting on its almost inconceivably large sovereign debt for a ninth time, and negotiations between the country and existing creditors appear no closer to conclusion.
The country is also facing the unexpected economic stress that coping with a global pandemic brings, leading many to question exactly how the government is going to cope with its growing financial woes.
During a webcast this Tuesday economic minister Martin Guzman said: “There is a big chance that the deadline is extended so we can eventually make the amendments that are necessary in order to achieve a sustainable deal with our creditors”. This is a nugget of hope, but with just days until the deadline for default, it's edge-of-the-seat stuff for anyone with a vested interest.
The country missed its payment on April 22, setting a deadline of May 22 to complete negotiations with creditors before the end of the grace period, or else default. An offer was made of a further three-year grace period on payments and an undisclosed haircut, but most were sceptical, and there was not enough acceptance of the exchange offer to allow for a deal.
|
|
"In a sense the whole exercise is somewhat obsolete if the pandemic is going to have the effect on the world economy that we all fear it is likely to have" |
|
|
"Emotions on both sides are running pretty high," he said. "What is fascinating is that Minister Guzman has said that his proposal reflects the government's assessment of unsustainability even without regard to Covid-19. So in a sense, the whole exercise is somewhat obsolete if the pandemic is going to have the effect on the world economy that we all fear it is likely to have."
For instance, the state of commodity markets – plus financial markets' appetite and ability to refinance risky deals – are 'huge uncertainties'.
"I can appreciate the Fernandez administration's desire to get the economy back on its feet, and to do that you've got to start somewhere. A debt deal is one place to start, but it is a constantly moving target," he added.
See also: Q&A with sovereign debt legend Lee Buchheit
Little progress has been made in the rebuilding of the fractured economy as Argentinian rulemakers and the rest of society await the final details of its latest debt restructuring. The government of newly-elected president Alberto Fernández promised late last year that an updated deal of the country's $100 billion debt would be on the table by the end of March – of which around $70 billion is owed to foreign debtors. While the offer was made, an agreement between the government and creditors has yet to be reached. The country has since suffered economic strife as it battles the coronavirus pandemic, despite the government's relatively quick action to attempt to keep infection and death rates largely at bay.
"The economy has completely made it worse," said Gabriel Torres, lead sovereign analyst for Argentina at Moody's, who downgraded the country from CAA2 to CA and changed its outlook to negative at the beginning of April.
"They are now under more financial stress than even before, just as they need it," he added. "We were not expecting the economy to grow. 2018 and 2019 were very bad years. But you could – if not for the pandemic – have expected some kind of growth that would have put it in a better position to offer something more. But this adds yet one more burden to the already burdened economy."
See also: Lawmaking in Argentina on hold in lieu of debt restructuring
Liquidity works both ways
As investors stare down the barrel of the impending economic crisis, questions surrounding priorities have to be asked. Certain debtors may hold outstanding debt from Venezuela, Argentina, Ecuador or other ailing sovereigns that may not materialise any time soon. In this situation it might be in investors' interest to accept significant haircuts in order to free up some liquidity; alternatively it may also be more sensible to wait until the country defaults before pursuing legal action and reaping higher rates at a later date.
"Now is obviously not a time that Argentina can pay a lot, but at the same time that may give you a higher yield," said Roberto Silva
|
|
"The government is pushing because it thinks that creditors are likely to accept a worse offer" |
|
|
Although it has not said so explicitly, it appears that the government thinks otherwise. "The government is pushing because it thinks that creditors are likely to accept a worse offer. It works both ways because at the same time it may give a higher yield, so the value of the proposal is lower."
"I'm confident that there's going to be rationality. Argentina will come to an agreement and it will be a happy ending," added Silva. "But there's no promises of that, of course."
See also: ConocoPhillips, PdVSA agreement to open creditor floodgates in Venezuela
At some point the country will need to address the medium and long-term questions of how it will be financed. "Nobody is asking that question today because there are bigger problems, but at some point Argentina will have to get past this emergency stage and present an economic and financial plan of some kind."
