Argentina proposes 62% cut in interest payments

Argentina proposes 62% cut in interest payments

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Argentina announced its restructuring offer for $68.8 billion in foreign-law bonds on Thursday after several weeks of delays, proposing that creditors accept a three-year grace period and 62% discount on interest payments.

"Today Argentina cannot pay anything and for several years it cannot pay anything," Economy Minister Martín Guzmán said in a televised presentation of the offer.

According to the proposal, Argentina will resume making interest payments in 2023, starting at an average interest rate of 0.5% and increasing gradually over the years, "but at sustainable levels," Guzmán said.

"The average interest of the proposal is 2.33%," Guzmán said, flanked by President Alberto Fernández, Vice President Cristina Fernández de Kirchner and several governors and lawmakers at the Quinta de Olivos presidential residence on the outskirts of Buenos Aires.

The government's offer is in line what analysts told LatinFinance on Wednesday. They said the government would look to give Argentina enough time to emerge from a recession in its third year, allowing tax revenues and dollar inflows to rise so the country can be in a position to pay the debt on time again. The other focus is on paying less in interest, in line with a decline in international interest rates. The 10-year US Treasury bond yield, an indicator of international rates, dropped nearly 70% to 0.595% on Thursday from 1.921% at the start of the year.

"The proposal is more a reduction of interest than of capital," Guzmán said, explaining that capital payments will be cut by 5.4%, or $3.6 billion, and interest payments by 62%, or $37.9 billion.

Guzmán did not say how much of Argentina's foreign-law bonds will be included in the offer, but his estimates for the reductions put the total at $68.8 billion. In guidelines presented on March 31, the Economy Ministry said it wanted to restructure $83 billion in foreign-currency debt, including both local- and foreign-law notes.

Guzmán said the government will make the offer to bondholders on Friday and give them roughly 20 days to accept it or not.

"It is a sufficient period for our creditors to make decisions," he said.

Talks with bondholders
Guzmán has negotiated with bondholders since first announcing the restructuring plans at the end of January. Presenting the official offer, however, was delayed from the original deadline of March 31 by the coronavirus outbreak. The government has shut down the economy from March 20 to at least April 26 to try to stop the pandemic from overwhelming the health system.

Now it may not be easy to convince the country's creditors to accept the proposal, Guzmán said.

"An understanding has not yet been reached with the bondholders," he said.

Investors are pressing for Argentina to shore up its fiscal accounts "quickly" and in "larger amounts," but Guzmán said that was out of the question.

"That would destroy the opportunities of millions of Argentines, and we will not allow it," he said. "The limit is the offer that we are going to present tomorrow."

His line-in-the-sand stance, however, may be how the bondholders react.

They are going to "play very hard," Guzmán said. "There are many interests at stake. The voices of our creditors, who want Argentina to pay more, will resonate."

Investors holding Argentine bonds declined to comment until they reviewed the proposal. Three investor groups with billions of dollars worth of Argentine debt are looking at the offer and will likely reply with counteroffers in a day or two, one source told LatinFinance.

Virtual default
Argentina will also ask the International Monetary Fund (IMF) for a three-year grace period before it begins to repay the $44 billion loan it got in 2018, Guzmán said.

For his part, Fernández said the Argentina today is in "a sort of virtual default," but he added that the goal is to emerge from the debt crisis as soon as possible.

"We want to get out of this situation," he said, putting the focus on making sure the debt can be paid on time and in line with Argentina's capacities, which have diminished with the health crisis.

The IMF recently said Argentina's economy would shrink by 5.7% this year, far worse than the 1.3% decline it had forecast before the outbreak of COVID-19.

Fernández said he did not want the pandemic to delay a resolution of the debt crisis, but to help bring Argentina together to support its offer to bondholders to get the country back on track.   

"A sustainable debt is a debt that does not postpone Argentina," he said. "We are not signing blank checks or papers that we will not be able to fulfill."