The current economic crisis is milder than the collapse of 2001-02. And the country’s politicians are more responsible
Financial Times – Argentina’s creditors holding out hope that they can avoid losses on the country’s bonds are “living in fantasy land”, one big investor said, reflecting tensions over the government’s reorganization of its massive debt pile.
Alberto Fernández, who is expected to win presidential elections later this month, has assured markets that losses on bonds would not be necessary as part of the debt’s “voluntary reprofiling”, as long as creditors give Argentina’s economy time to start growing again.
But an economist close to Mr Fernández said: “From knowing politicians, they always like to delay the pain.” That could mean issuing new bonds to free up the government from making interest payments over the next two to three years. An “even more aggressive” approach would be “Ukraine-style” losses — a so-called haircut — of about 20 per cent, the economist said.
One international creditor argued that those expecting to avoid losses are being unrealistic. “The IMF is a senior creditor and will want to see private creditors seeing some pain,” the person said, referring to the IMF’s $57bn bailout program for Argentina put in place during a currency crisis last year.
In recent weeks, investors have been clamouring for Mr. Fernández’s attention in an attempt to influence how he might restructure the country’s debt burden if he wins. More than a dozen groups of investors have submitted radically divergent proposals. One option would preserve the bonds’ principal amounts and interest payments, and finance any shortfall for those interest payments in the next two to three years with revenues from the sale of credit default swaps.
Another person with knowledge of the proposals said they were “all over the place”. “Hedge funds waiting to buy cheap are saying a haircut of 50 per cent, while those with lots invested [in Argentine bonds] are saying no haircut — and there’s everything else in between. But there are no serious proposals,” said the person.
Although observers caution that it remains too early for concrete decisions to be made, with presidential elections still weeks away, it is clear that the IMF will play a key role in the negotiations.
Without its approval, little progress can be made. “I don’t think anyone can have a proper conversation with the Fernández administration without the IMF.
It takes three to tango in this particular instance,” said Patrick Esteruelas, a partner at Emso Asset Management. “Without an IMF programme in hand, investors will be wary to agree to any restructuring that doesn’t have a credible policy stance behind it.
Only once they have negotiated an agreement with the IMF will we know what kind of haircut [might be required].” Even if a haircut is not necessary, Mr Esteruelas added, lowering interest payments and extending maturities “could translate into a pretty sizeable decline in overall recovery values”.
Argentina “probably needs a high degree of payment relief” given the scale of its debt, said Brett Diment, head of global emerging market debt at asset manager Aberdeen Standard Investments.
“If there is a pure maturity extension, there will be short-term relief in the market, but ultimately Argentina has some pretty large dollar refinancing requirements.” Carlos Abadi, a specialist in debt restructuring, thinks creditors would be most likely to accept a deal that involves no haircut on bonds’ principal or coupons, a substantial extension of maturities, and new securities issued to cover missed coupon payments over the next two to three years.
Mr Fernández insisted last week that he would lead a “serious and sensible” negotiation with creditors. But “to be able to pay, let us grow. If not, there is no way,” he said, suggesting that his government would attempt to emulate Uruguay’s restructuring after Argentina’s 2001-02 debt crisis, which had a heavy impact on the neighbouring country.
“If these guys want to get the economy back on track, that means they want to have a quick restructuring,” said another international creditor. “They will need to offer something decent and have to convince creditors that they are going to make the right policies to bring the country back to a decent situation.”
Sean Newman, a portfolio manager at Invesco, added: “The last thing you want to deal with is a protracted dispute with bondholders. Given that this is a liquidity event, I see no reason for there to be a haircut.”