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Argentina | Hard work begins

| December 6, 2019

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

The next phase in Argentina starts with the appointment of Martin Guzman as the Economy Minister with a mandate for debt restructuring. His recent speeches have offered views similar to President-elect Fernandez focusing on liquidity relief and repayment based on higher revenues instead of spending cuts. Guzman has also referred to a fast track of no default in December and successful restructuring by March to “avoid destabilizing macroeconomic effects.” None of this sounds realistic.

The fast track for debt restructuring would only be possible if the market and Argentina agreed on the country’s debt repayment capacity.  The bottom line is that current market prices are vulnerable to the downside. There is high execution risk since weak economic growth and weak commitment to fiscal discipline will likely constrain repayment capacity and argue for a haircut on external debt. It’s difficult to expect pragmatism from an ideological economic team.

Guzman’s presentation on the “next big test for the sovereign debt crisis resolution architecture: Argentina 2020” ends with a question: will this time be different? This question mark ominously raises concern whether recovery value will be higher than the 2005 debt restructuring proposal. There are only a few slides for reference, but there is enough information on a few important assumptions. The ability to repay is much worse now versus 2005; however the apparent willingness to repay, or at least avoid the disruptive and extensive litigation risks of the last default, seems to be higher with the suggested re-profiling instead of restructuring and negotiating ahead of a hard default.

The debate boils down to whether this is a liquidity or solvency problem and whether a debt re-profiling is consistent without fiscal discipline or economic growth.  The goodwill to repay on the consistent reference to re-profiling or maturity extension is a function of their ability to repay.  This is the hard constraint.  It’s not enough to say that you hope to repay later when there is no realistic debt repayment plan.  All of the previous statements are only early intentions that are not based upon any realistic analysis with no economic transition team. This could clearly shift once the hard work begins.

The new economic team should set the context for recovery value. It’s hard to expect pragmatism for economic reform when the appointment to the Economy Ministry may reflect the ideological loyalists to Kirchnerismo.  If Kirchnerismo discourages FDI-led economic growth and refuses to cut back spending entitlements necessary for a primary fiscal surplus, then what provides the future savings for debt repayment? The alternatives are either convincing the 75% majority of bondholders to “extend and pretend” on forfeiting all debt service for two years or shifting towards a pragmatic stance and embracing the pension reform necessary for a structural primary fiscal surplus.  This would allow for a fast track for debt restructuring and avoid a retest to lower bond prices reflecting the alternative of a significant haircut on capital—perhaps closer to 50% than 30%.

“We are going to pay the debt the day we have grown, produced more, exported more and obtained the dollars (higher revenues) with which to pay this debt,” Fernandez has noted. “There is no room for fiscal adjustment (spending cutbacks) due to an enormously complex domestic economic situation.” This does not sound like a fast track process to reassure bondholders about future debt repayment.  It also doesn’t make the March 2020 Guzman deadline realistic.

Argentina’s cash flow constraint will remain a concern with latest data on at the end of November showing a near depletion of the treasury deposits to $700 million at the central bank and higher deficit monetization of ARS60 billion in November of advanced loans from the central bank and then another ARS110 billion the first two days of December (equivalent to $2.8 billion). The NY law USD sovereign debt repayments are not overly onerous at $4.4 billion in 2002 and another $2.3 billion including quasi-sovereigns against the current $14.4 billion of liquid FX reserves.  However, it becomes increasingly complicated on allocating scarce USD across the economy and a deceleration of the recent exporter inflows as agricultural producers frontloaded inventory ahead of the threat of higher export taxes. The treasury cash flow management appears increasingly complicated with a reactive stance from the Fernandez administration facing fewer options on the delayed economic transition. The ideological constraints suggest higher execution risks on managing cash flow stress and creditor relations with increasing potential for negative event risks and subsequent downside price risks for bonds.

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