Debt Crisis
Argentina's Debt Debate: Burn Reserves in Negotiations or Default
Finance Minister Martín Guzmán wants to negotiate the debt, but the reserves would only last six months if the private creditors were to be paid in full.

Martin Guzmán refuses to default and has stated this publicly: he intends to do a preventive renegotiation of the sovereign debt and has given a clear signal to the market by announcing that he will take some 4.6 billion dollars from international reserves to pay commitments in dollars.

The market, however, knows that this money is insufficient to cover maturities after March, unless some creditors are left unpaid. The minister has already done it by postponing $8 billion of maturities with the creditors of the Treasury letters until August 31. In this way, that money is sufficient to pay all interest and maturities under national and foreign law with private creditors up to and including June. This is why the dollar bonds have risen so much these past few days. On Monday, dollar bonds rose by 8% and the country risk broke through the 1900-basis-point level.

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It takes a lot of creativity to call this a favorable situation for negotiations, but the fact that the bonds are beginning to recover their price and are moving away from the "vulture" zone is a first positive step. After all, the worst thing that could happen to the minister is that by going into default the price of the bonds will be depressed to the point of whetting the appetite of people like David Singer, and that that others like him will resort to the New York courts to litigate for another decade. Worse still, the minister would have spent every last penny he had only to delay a default by a few months. That's why some market analysts believe that renegotiation with a discount is impractical while the debt is still being served.

"Paying them all off would be suicidal," a leading Wall Street bank analyst told LPO. Sooner or later, the fact is that there is no money to pay and choosing between an open default with money reserves and doing it without them within three months, the former is the better option. The debt with the multilateral organizations that must be paid, such as the IMF, amounts to 2.8 billion dollars in interest, but capital maturities could be postponed for another 3.75 billion dollars with bilateral agreements, this includes the 2.011 billion dollars with the IMF. For the time being, the IMF has shown itself willing to collaborate and the CAF (Corporación Andina de Fomento, a South American development fund) and the Inter-American Development Bank have signaled that they intend to maintain exposure to Argentina, but this does not mean that they do not demand at least the interest payments.

That is to say, the debt that is possible to renegotiate is the debt with private creditors, local and foreign, with bonds under Argentine law and under foreign law. Of this type, between January and June 2020, there are maturities of 11 billion dollars in foreign currency.

That is to say, the debt that is possible to renegotiate is the debt with private creditors, local and foreign, with bonds under Argentine law and under foreign law. Of this type, between January and June 2020, there are maturities of 11 billion dollars in foreign currency. If Guzmán had not kicked in 8 billion Treasury letters of credit by August, it would be 19 billion. And then there's about $1.6 billion of debt in local currency. Daniel Marx warned last week about the risks of punishing bondholders under Argentine law.The peso debt, on the other hand, is not as problematic and Guzmán has already managed to renew some of the December maturities with a new letter. What is problematic is that the country is short of dollars and to get them, you need access to international markets and, for that, the debt needs to be sustainable again.

Last week, Former Secretary of Finance of Argentina and Quantum Finanzas CEO Daniel Marx warned against penalizing bondholders under Argentine law.

The peso debt, on the other hand, is not as problematic and Guzmán has already managed to renew some of the December maturities with a new letter. What is problematic is that the country is short of dollars and to get them, you need access to international markets and, for that, the debt needs to be sustainable again.

According to economist and EcoGo consulting firm CEO Federico Furiase, setting aside the debt with the international organizations, with the almost 4.6 billion dollars of reserves that Guzmán will take, there is room to stretch the renegotiation until the end of June without incurring new defaults in both jurisdictions (Argentine law and foreign law), while waiting to reach the minimum acceptance of the restructuring proposal of 65% and 75% of each series of bonds as required by each collective action clause (CAC) in the issues under foreign law.

The consensus is that, in the long run, bonds will be treated equally under foreign and domestic law. But the doubt lies in whether the government will choose in the meantime to default on the debt under Argentine law or whether it will risk running out of bread and butter, that is, out of reserves and with no access to markets due to default and unfinished negotiations.

The alternative would be to postpone payments of the bonds under domestic law and keep on paying only the debt under foreign law, with which the 4.6 billion would be enough to cover a whole year of negotiations without defaulting with these creditors.

"Under this second scenario, the placement of the Treasury bill to the Central Bank is a good sign for international law bonds. Given the structure of the 2020 maturity profile (where 87% of the 30 billion dollar bond maturities with the private sector correspond to local legislation), the CAC thresholds and cross default/acceleration clauses of the international legislation bonds, and the urgency of achieving a fast and successful debt negotiation with private creditors that would allow to decompress the country risk and stabilize the demand for money to loosen the external constraint and stabilize the nominal variables, it would make sense to immediately make the bond restructuring proposal local and international legislation under equal treatment, automatically applied for local legislation", Furiase said.

The consensus is that, in the long run, bonds will be treated equally under foreign and domestic law. But the doubt lies in whether the government will choose in the meantime to default on the debt under Argentine law or whether it will risk running out of bread and butter, that is, out of reserves and with no access to markets due to default and unfinished negotiations.

Daniel Pesce, President of the Central Bank of Argentina 

It should be remembered that a default on bonds under national law would mean that the country risk would rise again, which would also make renegotiation difficult. Although Wall Street does not discriminate when pricing bonds if the default is only under domestic law, it does determine that the payment of credit default swaps (CDS) will not be triggered and will continue to keep vultures away from Argentina's debt.

Other risks also raise the specter of default: in short, it is very likely that energy companies will be unable to comply with their negotiable obligations due to default in the payment chain. This would be another blow to Argentina's assets. And the greatest risk comes from the macroeconomic side: for Guzmán to take dollars from the Central Bank to pay the debt and also ask for pesos, it is necessary for the Central Bank to continue buying dollars in the market to restore the reserves and sustain the economy even with the clamping of the exchange rate without delay and without inflationary acceleration, almost a chimera in the face of the recent fall of the demand for pesos.

The market is watching closely for the government's next signal: on December 31, interest on bonds under domestic and foreign law will expire, so Guzmán will give the next clue about his strategy.

The other risk that cannot be ruled out is that the negotiation might be extended due to differences in technical criteria between Martín Guzmán and the creditors. As Furiase pointed out, "For the same reduction in the present value of the bonds (whether due to a decrease in capital or the postponement of payments) it is possible that the exit yield or the yield of the bonds when they come out of the restructuring will not coincide, and this is key so that, in the future, the funds will find it convenient to accept the government's proposal".

For the time being, LPO has learned that international creditors have not yet been approached by the Fernández administration and, despite the urgency, negotiations have not started. The market is watching closely for the government's next signal: on December 31, interest on bonds under domestic and foreign law will expire, so Guzmán will give the next clue about his strategy. If he hurries the default on the local debt to gain time with the creditors under New York law; or if he raises the ante and tries to close the negotiation in less time -perhaps with a gesture of good faith on the part of the creditors to suspend some collections voluntarily- with the risk that the money will run out, he will go into default and end up with the bond price down and back in the hands of the vultures anyway. 

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