The debt restructuring process in Argentina is prolonging as the Latin giant defaulted again in May, when it failed to pay $500 million on the stipulated date. This points to the country’s ninth sovereign default, following which it successfully reached an agreement with foreign creditors to restructure $65 billion in sovereign debt in August.
Argentina owns billions of dollars to the International Monetary Fund and other bondholders across the world, mainly in the US. The country has pushed its debt amortisations to 2025 and has drastically reduced interest payments. Currently, its authorities are holding talks with the International Monetary Fund over a new loan programme replacing its failing $57 billion programme that was launched in 2018. Nearly $45 billion in funds have been disbursed under the new loan programme, and the first payment is due in September 2021. It is reported that both parties ‘share the view’ that tackling Argentina’s challenges necessitate developing a few carefully balanced policies to rebuild the foundation for sustainable and inclusive growth.
In November, Bueno Aires province had initiated talks with the International Monetary Fund on a longer-term Extended Fund Facility. Again, the province has extended the already delayed-deadline to January 2021 for bondholders to agree to a restructuring deal of nearly $7 billion in foreign debt.
Although Argentina had managed to secure the backing of its creditors and to exchange 99 percent of the bonds, the situation is changing. Issues related to foreign creditors are next in line to be addressed. Foreign creditors scarred by this year’s debt restructuring have urged the International Monetary Fund to come up with ultra-rigorous conditions for the new programme. According to them, the national government is forcing provincial authorities to demand debt restructurings, which in turn, are deeply affecting most of the market. Mangart Advisors’ Riccardo Grassi, who was involved in finalising the recent debt deal, told the media, “We want the programme structured so the debt is declared (by IMF) as sustainable with a high probability.” More importantly, experts monitoring the country’s deal restructuring firmly believe that continuous debt restructuring could set a precedent for future sovereign crises in the country.
Biting recession cuts into the economy
Being the third-largest economy in the region, Argentina is expected to contract almost by 12 percent this year, according to the International Monetary Fund. In this context, the Argentine government said that a separate restructuring of local law dollar debt would allow the country to bring a financial relief of $37.7 billion over the next ten years and help to cut the average interest payments on foreign law bonds to 3 percent from 7 percent. The deal will provide sufficient time for the Argentine government to explore new ways to clear its billion dollar dues which it owes to the International Monetary Fund and other bondholders. Although the deal is a saving grace for the country, it is certainly not the end of all its economic problems. Surpassing the immediate problems of debt and debt reissuance, the country has fundamental economic complexities to untangle—and the pandemic has only added to its woes.
Its economy is expected to contract by nearly 12 percent this year, but the worst part of all this, is that the currency crisis and spiraling inflation have already done the damage. Amid this tough economic cycle, the deal might give the country an opportunity to save its credibility on the global front.
IMF lends support to the Argentine government
What has come to Argentina’s immediate rescue is the International Monetary Fund which insisted that sufficient time is necessary for the country to revive growth. Ever since the country received backing of creditors in August, prices of the newly issued government bonds have significantly dropped. As bondholders accepted an income reduction of almost $40 billion over the period between 2020 to 2024, the country’s debt in relation to the gross domestic product is set to increase to around 110 percent this year, which is nearly a rise of 12 percent compared to its public debt last year. Also, the share of the public debt denominated in the foreign currency appears to be broadly unchanged, at about 70 percent. The increase in Argentina’s debt-to-GDP ratio is due to the economic contraction, estimated to be around 12 percent this year by the International Monetary Fund, as a result of the coronavirus pandemic.
Notable challenges in the debt restructuring process
Meanwhile, the country was given two options in restructuring its debt: it can negotiate a reduction in the principal or it can accept no reduction in the principal, in exchange for a large reduction in interest payments. It has chosen the latter option since the government has considered it to be highly suited —keeping in mind that the problem is related to liquidity and not solvency. It also led to a significant reduction to bondholders in net present value. However, the amount of debt owed remains unchanged. What the current administration did in the situation is pass the problem to its successors. The country’s fiscal deficit has also skyrocketed this year to reach 10 percent of its gross domestic product, according to the government’s estimates.
Without access to international capital markets and having a small domestic capital market and financial system with a low savings rate, it is unclear how Argentina will fulfil its debt payments when the time comes. Given the slow pace of consolidation and the state of its public finances, the country is heavily relying on the resumption of its economic growth to start clearing its public debt. However, a major economic reform is first required for the country to recover from a contraction of nearly 12 percent this year as projected by the International Monetary Fund.
Current policies hamper investments and discourage exports which need to change quickly. With the country renegotiating its outstanding $44 billion debt with the International Monetary Fund which is still by its side at the moment, it might lead to formulating a coherent economic programme that would bring in a change to the gloomy investors mood. But this is not going to be easy. Major reforms need to take place and the onus is on the administration to bring significant change to Argentina’s current monetary and fiscal framework. What Argentina needs in actuality is its structural reforms when it comes to social security, labour markets and provision of public services.
Another challenge that is presenting itself to the administration is the urgent need to tackle an imminent exchange rate crisis which was created by excessive monetary financing of the budget deficit. The government announced that it will print money to finance at least 60 percent of its budget deficit in 2021, but many would argue that they are inconsistent with the 2021 budget projections of a declining inflation rate to 29 percent from an estimated 38 percent in 2020. The country needs to prevent itself from heading toward a historic 10th default and for that it must work closely with the International Monetary Fund. This might actually help the country to bring an end to its debt restructuring saga.
Its fate rests on a definitive plan
Argentina needs to have a comprehensive plan to tackle provincial debt amid various smaller regional restructurings. In September, the minister forwarded a 2021 budget bill to the Congress which included a forecast for a primary fiscal deficit next year of around 4.5 percent. However, a fresh deal with the International Monetary Fund is unlikely before March next year.
The 1 percent of bonds that did not meet collective action clause (CAC) thresholds of support for a restructuring highlighted pockets of holdouts on individual bonds, though Guzman said it was not a major cause for concern at the moment and the same would be resolved soon. The government also excluded certain bond series such as the USD Par 2038 Bonds II and III and Euro Par 2038 Bonds II and III. The bonds being restructured have collective action clauses and the government said in a statement that it needs a certain level of support to restructure these bonds.
Older 2005 indenture bonds require a combined 85 percent of creditor support, with two-thirds of them necessitating support on each individual series. Although the idea is counterintuitive, many experts argue that the coronavirus pandemic has helped the country to secure a healthy deal. A deal in fact was necessary for the country and the bondholders, and the pandemic has only lessened the chances for the latter to have the deal in their favour.