Argentina's latest default doesn't have to mean another economic collapse
Argentina has formally entered its ninth sovereign debt default in its history, but negotiations with creditors are still ongoing to prevent this default unravelling into a larger economic crisis that could again push the South American country down a populist and nationalistic path.
Argentina's debt restructuring negotiations with creditors appear stuck, but the recent extension of the country's self-imposed deadline for talks with private debt bondholders keeps alive the possibility of reaching some form of a longterm deal. Ultimately, however, debt restructuring will not by itself change the fiscal and monetary policies that initially led to Argentina overborrowing. Whether the country's default again transforms into another full-fledged economic crisis will instead hinge on its government's willingness to reach a compromise with bondholders, as well as produce a credible, long-term economic growth plan that remedies the country's currently untenable levels of public spending.
Argentina's prolonged tango with international investors and private sector creditors is about to reach a crescendo in which capital markets will either intensify their embrace with Buenos Aires, or move into a prolonged rift that would be costly for both sides.
• On May 22, Argentina officially entered its ninth default on international debt after failing to make a $503 million interest payment on Eurobonds by the end of a contractual 30-day grace period.
• Argentina was already in default on dollar-denominated domestic debt, on which it unilaterally declared a moratorium on April 6.
• On May 14, the province of Buenos Aires also defaulted on $7 billion in debt when it missed a $150 million payment.
President Alberto Fernandez's administration has yet to present a longterm economic plan, and instead seems to be betting on a debt deal that will give some reprieve to public finances.
• On April 17, Argentina proposed an initial debt restructuring deal that as many as 80 percent of investors in Eurobonds totalling $66.2 billion have rejected.
Bondholders presumably found the original proposal, which Buenos Aires says is still on the table, objectionable because Argentina would capture nearly all of the existing secondary market discount of 65-70 percent through a 5 percent “haircut” on principal, as well as a 62 percent reduction in the value of interest payments with no payments to creditors for three years.
Argentina's proposal also lacks a “menu” of alternative options from which creditors could choose from to provide equivalent debt relief via a mix of par bonds with reduced interest or discount bonds with higher interest rates.
The draft deal includes very low longterm economic growth assumptions as well, which creditors deem as very conservative.
Argentina recently extended its debt restructuring negotiations with creditors until June 2, but is giving conflicting signals about what kind of new proposal it is ready to present, if any.
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Economy Minister Martin Guzman says the country is waiting for creditors to further modify their proposals to bring them closer to Argentina's request to delay any payment until 2024, which is unlikely.
But in a May 22 interview with Reuters, Guzman also indicated that some revisions to the draft deal could be forthcoming, which may include concessions on Argentina's proposed interest rate cut, as well as some modest payments.
Three groups of bondholders have presented counteroffers to Argentina's original April 17 proposal, which still suggests a willingness from both parties to negotiate in good faith and the existence of some common ground. This, combined with the continuation of talks and the lack of public acrimony that characterized previous negotiations, signal that there is ground for some compromise that could provide the basis for a settlement where the latest missed payments would be only a hiccup in Argentina's long debt saga. A potential agreement may include:
• A grace period on all payments of less than three years, perhaps with small interest payments that increase over time and a shorter overall maturity for when final payments are due.
• Compromises on the overall amount of the “haircut” or reduction in the present value of cash flows.
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Allowing creditors to choose between par bonds, discount bonds or interest reduction bonds. A proposal by a minority group, mainly holding previously restructured debt from 2005, for GDP-linked contingencies in which creditors could conceivably recover higher amounts if the economy does better than now projected.
Avoiding another full-fledged crisis after Argentina's latest default will hinge on whether its government can produce a credible economic growth plan and reach a debt restructuring deal with bondholders.
However, there are still obstacles that could complicate the final success of a debt restructuring agreement between Buenos Aires and bondholders.
• Some hard-line bondholders could decide to hold out from any deal that the majority of the private lenders agree with Argentina.
Argentina and creditors could also fail to agree on what a credible longterm economic recovery plan for the country, and the Argentine's government willingness to present one in the first place.
But even with a deal, Argentina's future economic prospects remain dire.
• Due to the fallout from the COVID-19 pandemic, the Argentine economy is expected to contract by more than five percent in 2020.
• The global oil price crash has complicated Argentina's plans to continue exploiting the shale-rich area of Vaca Muerta, which requires reference oil prices upwards of $45 per barrel to be viable.
• Tensions with neighbouring Brazil and an initially protectionist outlook from Argentina complicate the possibility of the Common Market of the South (Mercosur) successfully negotiating more free-trade agreements that would expand export markets for Argentina, as well as the rest of the region.
• Avoiding a prolonged default and the subsequent financial crisis will thus also require deft management of the economy, as well as the involvement of key external institutions, such as the International Monetary Fund.
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