Almost two months into Alberto Fernández’s presidency, Argentina’s private creditors are increasingly worried about the slow progress in fixing the heavily indebted country’s most urgent problem: avoiding its ninth sovereign debt default.
This frustration has been reflected in rising bond yields and a widening of the gap between official and parallel exchange rates. With a provincial debt default possible in the coming days and debt payments to international creditors due this year, Mr Fernández is in on a tour to garner support. He met Pope Francis last week and will meet German chancellor Angela Merkel and France’s president Emmanuel Macron this week.
How did it get to this?
When the left-wing president Mr Fernández was sworn in, the country was already in a state of virtual default. His right-wing predecessor Mauricio Macri had promised sweeping economic reform and borrowed heavily to smooth the transition to a more market-friendly economy. But support for Mr Macri’s reforms evaporated during a currency crisis in 2018. This prompted a historic $57bn IMF bailout. With debt payments due to international creditors this year, Mr Fernández is under pressure to present a plan to avert default. He has said he wants a deal by the end of March.
What happens next?
Monday is the deadline for creditors of the province of Buenos Aires to accept the postponement of payments on the Argentine province’s debt. If they do not accept this delay, that could pave the way for a default on the payment deadline on Friday.
“Beyond the [creditors’] understandable concerns, it’s no good to jump to prejudiced conclusions given that we’ve just started negotiations. We are very optimistic that we can reach a solution,” said Fernanda Vallejos, an economist and congresswoman for the province of Buenos Aires, who said the government had been working overtime to resolve the issue. Still, a provincial default could undermine national negotiations. Some creditors fear that the province’s aggressive negotiation tactics could provide a template for the national government.
Last week, the ministry of finance published a new timeline for negotiations over the $100bn of international debt. Under this plan, the government will not provide a restructuring offer until the second week of March. This leaves creditors with just two weeks to respond if they are to meet the end of March deadline. Major creditors were “fuming” and may not “dignify the process with an answer”, the person added.
Why has so little happened so far?
The government wants creditors to say how big a haircut they are willing to take, but bondholders want to see a credible macroeconomic plan first. “It’s like two trains coming towards each other. We’ll see who blinks first. The good thing is that nobody wants a crash,” said Martín Redrado, a former Argentine central bank governor.
“What the government is asking for is unprecedented. It’s up to them to put something on the table,” said an international creditor close to the negotiations, arguing that the government needed to change its attitude “very quickly”, or any goodwill it enjoyed would be squandered. “Until the government comes up with an economic plan, we are in suspension . . . any restructuring proposal without projections for growth, the fiscal deficit and external accounts would fall flat.”
What is the IMF’s role?
Officials from the IMF met formally with economy minister Martín Guzmán in New York for the first time last week. Despite positive public remarks from both sides, there have been no substantial advances. That could change when Mr Guzmán meets the IMF’s new managing director Kristalina Georgieva in the Vatican this week, thanks to the attempts of the Argentine Pope Francis to facilitate a way out of the crisis. A Fund mission is also due to arrive in Buenos Aires on February 12. But, with no repayments due to the IMF from Argentina until 2021, IMF officials have said they may stay on the sidelines this year. Larger private creditors are keen for the IMF’s involvement to ensure a sound restructuring deal.
How likely is a default?
Both sides would prefer to avoid a default. Mr Fernández faces midterm elections next year and an economic recovery would boost his chances of a strong performance. A default could destroy his chances. “It would send inflation through the roof, and any residual confidence in Argentina would go out of the window,” said one veteran observer. “The government wants to avoid a confrontational default situation, but it is dithering too much and making the whole process more difficult and riskier.”
The timeline published last week suggests that only the most basic deal might be possible by the end of March. “There would still be a lot to sort out after that, but it won’t be that easy,” warned Daniel Marx, a former finance secretary who until recently was expected to lead the government’s debt restructuring team. “Today, the chances are greater that they manage to achieve a restructuring than not,” he said.
Source: Economy - ft.com
