Argentina’s plans to restructure more than $100bn of private sector debt have been thrown into disarray by the coronavirus pandemic, which is threatening to plunge the country’s already struggling economy into an even deeper recession.
While the crisis that has hit global investments could make creditors less willing to compromise, analysts warn, it could also embolden the government to push for a harsher deal, raising the chances of a disorderly default.
But it could present an opportunity to the new leftist government of President Alberto Fernández, providing a reason to escape its self-imposed deadline — widely regarded as unrealistic — of reaching a deal with creditors by the end of March.
Argentina is now into its third consecutive year of recession, with inflation running at around 50 per cent, after a currency crisis sent the economy off course in 2018, prompting austerity measures and a $57bn bailout from the IMF.
Analysts are now predicting the country’s economy could contract by as much as 3 per cent this year, forcing the government to rethink its strategy and concentrate on the most urgent problem of alleviating a deep recession. Last week it announced a fiscal stimulus package worth around 2 per cent of GDP.
So far 266 cases of coronavirus have been confirmed in Argentina, with four deaths. The country went into full lockdown mode on Friday.
“It’s clear that we are living in times of very high uncertainty, and that’s something that must be considered,” said Martín Guzmán, Argentina’s economy minister, on Friday. “Argentina has already made a massive adjustment of primary fiscal spending. There is no room in the short-term for continuing this dynamic.”
Meanwhile the IMF, which has lent $44bn to Argentina so far, reiterated its call on Friday for a “meaningful” haircut for private creditors. It said there was “virtually no scope” for the country to make debt repayments in the medium term.
Until very recently, Argentina’s priority was widely seen as cutting a deal with creditors as quickly as possible as the negotiations were holding back progress on the rest of the government’s programme. But the pandemic has changed its calculations.
“The chances of a hard default are higher than ever before,” said Alejo Costa, a strategist at BTG Pactual, a Brazilian investment bank, arguing that the political cost of a default for Argentina was significantly lower than it was a few weeks ago.
The government could now justify a harsher stance with creditors, given its need to direct its limited resources towards alleviating the current crisis, he said. But the hit to creditors’ investments worldwide would make it harder for them to accept a large “haircut”, or a reduction in the value of their bonds.
Mr Guzmán’s “dogmatic” rejection of high interest rates in order to ensure Argentina’s debt was sustainable was “completely unrealistic” for its foreign bonds, said Mr Costa. The interest rates investors were being forced to accept on reprofiled local debt, of around 2 per cent, was a worrying signal of what Argentina may attempt to secure for its foreign debt, he added.
“Most investors are willing to give Argentina time, a bridge to 2023 or 2024, to see how things work out, but there is a lot of reluctance to accept haircuts on principal,” he added. Instead, he said, many creditors would accept the lengthening of maturities and lower interest rates, which in some cases are higher than 40 per cent.
One international creditor warned investors were growing increasingly frustrated with the attitude of the government, which has had little communication with them since it took power in December.
“The government still doesn’t understand that it needs to engage with bondholders. It seems to be planning on a take-it-or-leave-it offer, which will certainly be rejected . . . and then we go into the trench warfare of trying to bring the two sides closer together,” said the investor.
“Guzmán thinks he has invented a new way of restructuring sovereign debt. But that’s not the case.”
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The danger is that Argentina will relive the painful experience following its last major sovereign debt default in 2001, when many creditors refused a debt restructuring offer in 2005, leading to an acrimonious legal battle with “holdout” creditors that was not solved until 2016.
“What is different now is the collective memory in the market that holdout predators that had the stamina to stick it out got a very large recovery at the end — and that’s dangerous,” said one sovereign debt expert.
The government has made some progress, reprofiling some $4bn of peso bonds — local debt accounts for the bulk of its payment obligations this year — on Thursday. But it remains unclear how it will fix its foreign debt challenges.
“With all this noise [in the markets caused by the coronavirus pandemic], the government can kick the can down the road for a few months and postpone the debt offer,” said Santiago Lopez Alfaro, a partner at Delphos Investment in Buenos Aires. “But it’s a political decision.”
