Argentina makes an offer to restructure $83bn in debt
Argentina launched an offer to restructure $83bn of its foreign debt on Thursday as the cash-strapped nation attempts to avoid defaulting on its payments for a ninth time.
Investors were asked to accept a suspension on all debt payments for three years — not long before the end of President Alberto Fernández’s term — as well as a 62 per cent “haircut” on interest payments worth almost $38bn.
The government is proposing to pay interest rates of 0.5 per cent from 2023, rising to a maximum of 4.5 per cent, and a 5.4 per cent reduction in the face value of the debt, worth around $3.6bn.
“The reality is that we have not reached an agreement with bondholders about what is [a] sustainable [debt burden],” said Martin Guzmán, Argentina’s economy minister. He said that negotiations would last for 20 days.
“Today, Argentina can’t pay anything . . . [and] not for several years,” he added, urging Argentines to unite around the government’s proposal, which he said was the limit of what it was able to offer, in order to allow the struggling economy to return to growth.
Although Mr Fernández insisted that he would not take advantage of the coronavirus crisis to avoid paying Argentina’s debts, one international bondholder described the pandemic as “the perfect excuse” to make a harsh proposal.
Covid-19 has dealt a major blow to Argentina’s struggling economy, now in its third year of recession and saddled with inflation of around 50 per cent. Many have feared a default since Mr Fernández took office in December, doubting his commitment to economic reform and prioritising foreign debt over domestic spending commitments.
Investors were quick to denounce the offer as too aggressive, fuelling fears that the country was headed for its latest default. Argentina last failed to make payments on foreign debt in 2014 during the presidency of Cristina Fernández de Kirchner, who is now vice-president. It would be the country’s ninth sovereign debt default since it became independent just over 200 years ago.
“I don’t see how anyone could possibly accept the terms that are on the table,” said Patrick Esteruelas, head of research at Emso Asset Management. “The deal was presented very much as a ‘take it or leave it’ offer . . . I already had a bearish view, but this was worse than I expected.”
Eddy Sternberg, a portfolio manager for emerging markets debt at Loomis Sayles, a Boston-based asset manager, called the proposal “quite drastic”, adding that the prospect of a default has risen as a result.
But some analysts suggested that Thursday’s proposal may be designed to please the leftist followers of Ms Fernández de Kirchner, who sat beside Mr Fernández and Mr Guzmán as the offer was announced at the presidential residence.
The proposal announced on Thursday did not make mention of any maturity extensions, a move that Carlos Abadi, managing director of DecisionBoundaries, a financial advisory firm, described as “smart”.
“I expect negotiations between now and the finish line to focus on maturity extension only . . . The net present value [of the debt] is very sensitive to the maturity,” he said, adding that he was “more constructive” on Argentina’s prospects of avoiding default following the announcement.
The 20-day negotiation period is set to expire before the deadline for Argentina to make its next foreign debt payment of about $500m, which is due on April 22 with a 30-day grace period.
Argentina’s bonds have largely priced in the high likelihood of a default, having cratered in recent weeks as the coronavirus outbreak spread.
The value of its century bond maturing in 2117 has plunged 35 per cent since the beginning of March. It now hovers at 26 cents on the dollar. The price of another bond set to mature in 2021 now sits at 30 cents on the dollar, a 40 per cent slide over the same time period.
If bond prices fall even further, that could encourage so-called vulture funds to buy up Argentine debt cheaply with the aim of pressing for full repayment in US courts, as happened after Argentina’s last major default in 2001. That move triggered a legal battle that was not fully resolved until 2016.
The IMF, which is Argentina’s largest creditor after lending $44bn to the country since a currency crisis in 2018, has backed Argentina’s push for major debt relief from private creditors.
Alejandro Werner, the director of the IMF’s western hemisphere department, warned on Thursday of another “lost decade” for Latin America as a result of the economic toll of the coronavirus crisis.