Argentina’s Repeat Restructuring Recipes
Argentine securities were in free fall after the August opposition coalition primary election wipeout of incumbent President Macri and his party previewing a clean first round triumph, with credit default swaps predicting 85% of default as new Finance Minister Lacunza acknowledged immediate local and external debt maturity extension urgency. Stocks dragged the MSCI Frontier Index into jeopardy after outperformance through July, while the peso plunged 20% toward 70/dollar and ratings agencies assigned CCC blowup status. Treasury bills held by banks and official agencies will be re-profiled before the October contest, with outstanding dollar obligations across all categories over $300 billion, around 90% of GDP, close to the 2005 peak which set off a decade of crisis and creditor confrontation. The initial stage was an imposed 25% external bondholder haircut, but officials vow not to repeat such unilateral action as they face $25 billion in annual maturities over the next three years. The almost $60 billion IMF program was designed to facilitate commercial rollover, but the Fernandez-Fernandez ticket has indicated renegotiation or rejection if they win and previous assumptions must again be recalibrated in any case. International reserves are down to $55 billion and dollarization and deposit withdrawal domestically could inflict further interest and exchange rate pain, threatening to tip the benchmark rate toward triple digits. Planned Fund disbursements this year were over $20 billion and were to tail off to 5 billion in 2020 before repayment starting in 2021. A delegation visited after the poll result and pledged continued support, but Washington decision making will be delayed by the interregnum awaiting proposed Managing Director Georgieva, who must secure an age waiver since she’ll be 65 in the post.
The government debt is just over half market-based, with almost a quarter of the stock owed to development lenders including the Chinese. It is 80% of the aggregate with 20% corporate, and international bonds with collective action clauses are just one-fifth of instruments. Consensus economic estimates project a small current account surplus averaging $5 billion over the medium term, but cash flow relief was a consideration before the election shock and the T-bill restructuring will reduce net present value to 98 cents/dollar. Extrapolating for other forms at this juncture results in a wide possible exit spread range from 500-1500 basis points. Foreign law global bonds trade in the 40 range and a 75% majority is needed for future modification. Since their EMBI return dedicated investors are overweight and control around $25 billion, and distressed specialists resorting to litigation are in that pack. The “pari passu” covenant loophole which Elliott Associates used in the past to press its claims with an eventual $2 billion payout has been eliminated, but peers reportedly are devising other strategies. Quasi-sovereign corporate issuers may be in their sights for recovery value at a multiple of the 30 in the early 2000s episode, with the intent of raising CDS trigger pressure on the $25 billion gross notional sum tallied in DTCC data. Venezuela went through the determination process and verification recently and was then removed from the EMBI benchmark lifting the spread over US Treasuries to 350 basis points. Another “non-investable” blow to Argentina could be a bitter legacy with higher-profile concern for the election winner.