Argentina: Government unveils debt restructuring proposal amid coronavirus crisis
Following the government’s decision, in early April, to unilaterally postpone payments on USD 10 billion of foreign currency debt governed by local law until the end of the year, on 16 April the government launched a proposal to restructure around USD 66 billion of foreign debt which includes a three-year moratorium, a large cut on interest payments and a minor reduction in the value of principal. The proposal, which was already rejected by a creditor group on 20 April, came amid the economic blow from Covid-19 and stalled debt restructuring talks with international creditors.
Against this backdrop, the federal administration unveiled a plan for foreign debt restructuring, through which it hopes to get some fiscal relief to be able to shore up public finances and stimulate the economy. The plan includes a three-year grace period during which no payments would be made. After this period, it would then start paying interest of 0.5% in 2023, a rate which would then increase to bring the average coupon paid to around 2.3%—against an average of around 6.6% currently. This would result in a hefty 62% haircut on interest payments—almost USD 38 billion. Meanwhile, the face value of the debt would be reduced by a relatively small 5.4%—or USD 3.6 billion—for total savings of around USD 41.5 billion. Bondholders were also offered the option to swap their current debt obligations for new debt instruments, for which principal payments would start not earlier than 2026, and interest payments in 2022.
The government had to delay talks with creditors on debt restructuring as it failed to strike a deal by the self-imposed deadline of 31 March—needed in order to start a new financing program with the IMF. The lack of an agreement with bondholders, coupled with the economic damages caused by Covid-19, explains the recent restructuring proposal. Martin Guzmán, Argentina’s economy minister, said bondholders will have around 20 days from the formal launch on 17 April before the offer is closed to respond. On 20 April, a creditor group rejected the offer, calling the government to engage in further negotiations and to provide a more credible repayment plan. If a deal is not struck, the cash-strapped country is set for its ninth default since its independence. A deal is all the more important as it is a precondition to resume negotiations with the IMF on USD 44 billion already transferred by the Fund, and given the possibility for creditors to press for full repayment in U.S. courts, as bonds being negotiated are governed by international law.
Early in April, partly due to economic disruptions caused by lockdown measures, and as a consequence of dwindling fiscal revenues, additional public spending and a lack of funding sources, the government postponed the payment on USD 10 billion debt governed by local law due this year until 2021 or a date earlier to be defined by the Ministry of Economy. Although the move renewed concerns about the government’s strategy on debt restructuring, some analysts deduced it would give the country more room to repay its foreign-law debt, therefore limiting risks of unpredictable international lawsuits. However, with the proposal to restructure debt governed by foreign law, this risk is elevated. Investors appear skeptical of the current plan, which significantly increases the prospects of default, and a hard-fought renegotiation process is expected before the offer expires.
LatinFocus Consensus sees the economy contracting 5.5% in 2020, which is down 3.9 percentage points from last month’s estimate, before rebounding 3.3% in 2021.