Argentina says there’s time to reach a debt restructuring deal
May 7, 2020 |
Economy Minister Guzmán says some creditors have agreed to the terms and he is willing to entertain alternatives
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Argentine Economy Minister Martín Guzmán said on Wednesday that there is still time to reach an agreement with creditors to restructure $65 billion in foreign-law bonds, but he warned that any deal must be sustainable so that the debt can be paid over the long run.
“It hasn’t been easy achieving a deal,” Guzmán said. “We’re still working with our creditors and we will continue doing so.”
Guzmán spoke on an online panel hosted by Columbia University, where he was an associate research scholar before taking his job to run Argentina’s economy in December. The panel to discuss Argentina’s debt crisis, which included comments from Columbia economics professors Jeffrey Sachs and Martín Uribe, comes as Argentina approaches a deadline on Friday for reaching a deal.
So far, Argentina’s offer has been rejected by three groups of investors, who have argued that if falls short of what they think is needed to put the country back on track for sustainable economic growth and financial stability. In a reiteration of their snub, the groups said in a joint statement on Monday that they don’t think that the economic projections being used to justify the government’s offer are viable.
The government’s proposal calls for a three-year grace period on making any payments, a 5.4% cut to principal, and a 62% reduction in interest payments on $66 billion worth of external public debt. This would provide the country with $41.5 billion in debt relief, largely by reducing the interest rate on the bonds to an average of 2.33% from a current 7%.
In a presentation released by the government ahead of the call, Argentina highlighted that interest paid to service its debt amounts to 18.4% of central government revenues, a level not seen since the economic crisis of 2001-2002 when that figure hit 20.2%. It was that economic crisis and subsequent default on a then-record $100 billion in foreign debt and interest that ushered in the infamous period of holdout creditors and legal wrangling in the U.S. courts, a seized naval vessel and an eventual settlement 14 years later for $4.65 billion in 2016.
source: Ministry of Economy, Government of Argentina
Guzmán said he is open to hearing counteroffers, adding that so far only one has been made and it was rejected for not being in line with the goal of restoring debt sustainability.
“We have been emphasizing the principle of flexibility,” he said, adding that any alternative that allows the country to emerge with a sustainable debt “will work.”
He added that there are “multiple combinations of parameters in terms of the different elements of a debt offer, grace period, extension of maturities, reduction of principle, reduction of interest.”
While Guzmán said some creditors have endorsed and will accept the offer, it may not be enough to get the average of 75% acceptance from all bondholders for the deal to be successful. This is putting pressure on both sides to negotiate in order to avoid default, which could come as soon as May 22, the end of a 30-day grace period for making a $500 million payment on the three Global Bonds that are part of the restructuring proposal.
“There is still time,” Guzmán said. “If we heard from creditors that there is a different combination of parameters that satisfies their preferences and their interests better, and at the same time respects the debt sustainability constraints, we will of course be willing to have a deal based on such an alternative. We will continue engaging fully. It is our intention to reach a successful deal.”
GLOBAL FINANCIAL CRISIS
Jeffrey Sachs said Argentina’s debt is “tragically un-payable” in the context of the COVID-19 pandemic, which globally has tightened access to credit, cut tax revenue and increased government spending as economies contract.
For him, the key for Argentina is to achieve a lower interest rate so that it can emerge from a cycle of periodic defaults, including the latest in 2001. He said it is reasonable for Argentina to pay a lower premium that is above US and German bond returns, adding that the bondholders’ demands for interest rates of 7% or even higher are “absurd.”
Sachs warned that for creditors to play tough is "stupid” in the context of the worst economic crisis since the Great Depression that could push “many, many countries in financial distress in the coming weeks and months.”
Ahead of the panel discussion, José Ignacio Bano, head of research at InvertirOnline.com, a brokerage in Buenos Aires, said a possible interim deal could be a reprieve that would allow Argentina to stop paying the debt for a year or so, gaining it time to negotiate a proposal that is good for both sides.
“The window is opening to reach a sort of stand-still agreement,” he told LatinFinance. “This is the most constructive alternative. Argentina wins because it won’t have to pay the debt for a year, and it improves the likelihood that it will reach an agreement in the meantime.”
Bano said that “a lot of loose cables” are making it difficult to reach an agreement, such as the uncertainty about how much the economy is going to shrink this year and when it is going to return to growth. Without knowing this, it is hard for bondholders to envision how viable a debt repayment schedule could be, he said.
Guzmán said he estimates the economy will contract 6.5% this year and bounce back with 3% growth in 2021 before settling into a 1.7% annual rate of growth through 2030.
In an open letter published on Wednesday and distributed by the government's public relations team, 138 economists from 20 countries, implored Argentina's creditors to agree to the terms of the government's offer, calling it "responsible." The letter was penned by Columbia University professors and Nobel laureates Joseph Stiglitz and Edmund Phelps. They were joined by Harvard professor Carmen Reinhart. Stiglitz has been a mentor to Guzmán from his days at the university.
A GAME OF CHICKEN
Juan Cruz Díaz, a managing partner at Cefeidas Group, an international advisory firm in Buenos Aires, said he expects the negotiations to stretch beyond Friday, saying the D-Day will be on May 22, when Argentina must pay the $500 million owed on the three Global Bonds or default.
Both sides “are playing a game of chicken to see who gives in first,” he told LatinFinance.
Even so, there is social pressure to reach a deal. A poll by Poliarquía Consultores released Tuesday shows that 60% of Argentines want a deal, meaning that a default would hurt President Alberto Fernández’s popularity, Díaz said.
“A default would be seen as a failure,” he said. “Argentina has recurrent problems, but we have learned a few things, and I think that in our collective unconscious a default is negative.”
It’s not just that a default would cut off access to financing and damage the country’s reputation, but it could allow the political opposition to make a run to return to power, Díaz said.
“In this game of chicken, the bondholders have this in mind,” he said. “The government is playing hard, but at one moment it is going to have to ease up because they don’t want to default. There is too much at stake.”