Argentina: the clock is ticking, and the time is now

This is a longer version of what was recently published on the Financial Times about the need to reach a quick resolution on the latest episode of the Argentine saga, available at https://ftalphaville.ft.com/2020/06/12/1591974476000/Argentina--restructuring-in-the-time-of-Covid-19-/.

After its independence in 1816, it took almost 40 years for Argentina to organize itself and adopt its Constitution. Foreign investment started to flow shortly thereafter and between 1860 and 1914, Argentina experienced exponential growth fueled by foreign capital. By the turn of the twentieth century it was one of the richest countries in the world. But thereafter, populism and over indebtedness become the main culprits of a downward spiral that culminated in the country’s latest episode in May of this year - a ninth sovereign default.

 An attempt to cure the default is already underway and the Argentine government is currently negotiating with its investors to reach a resolution. Irrespective of the outcome, the damage has already been done. Each time Argentina carries out a debt liability management exercise, it widens the interest gap that it has to pay, as shown by Argentina’s blended borrowing rate of 6.3% versus Chile’s 3.3%.

However, there is a chance for redemption. Argentina has an unbeatable opportunity now to draw a line under the past and regain credibility. Hopefully, Argentina will start building a new story for the country and its future generations.

Much has been reported regarding the ongoing negotiations with Argentina and its commercial creditors, and whether the conversations have stalled. A unique aspect of the story is that despite creditors holding many different types of debt, they have converged, united and opened proper channels of communications with the government. The two most significant groups of creditors appear to be cooperating, representing a critical mass holding more than 31% of the total outstanding liabilities.

Another important feature of the negotiation is that the largest holders of Argentine debt are of a different kind. We are not seeing the kinds of the litigious holdouts that dragged Argentina through the courts for almost 15 years, as happened in the country’s previous default. A substantial part of the debt is held by large international asset managers, whose business model does not rely on litigation. These creditors seem to understand the complexity and risks posed by the two toxic components of Argentina’s situation: the Covid-19 pandemic and over-indebtedness.

Covid-19 has left few corners of the world untouched and Argentina is no exception. We are in the worst combined health, economic and financial crisis that we have ever witnessed, unfolding in an absurdly fast timeframe. This is undoubtedly producing a cash-flow and liquidity crisis in Argentina. Governments, banks and businesses must move swiftly and efficiently to save the economy.

 Moreover, given that most hard currency debt is benchmarked off the sovereign, a prolonged standoff by Argentina with its creditors has the potential to significantly increase financing costs to growing businesses essential for the country’s future prosperity. For a nation like Argentina with a young populace, it is vital to reach a restructuring solution as soon as possible that avoids increasing the costs of financing for business expansion and infrastructure spend, which are the engines of growth and job creation.

 The gap between both the current positions of the government and investors is very slim in financial terms, almost imperceptible for a sovereign government. The cumulative external debt service burden between now and 2023 (the envisaged horizon determined by the parties for Argentina to kick-start its economy) and assuming that there is no restructuring, would be $27.2 bn. Both parties have been working on the back of this baseline scenario. Argentina has made a proposal to only pay $0.9 bn of interest between now and 2023, while the two main group of creditors have indicated that they are willing to accept $3.4bn (i.e. a $2.5bn difference between both positions over four years). The creditors’ counter proposal in turn translates into a cumulative cash flow relief of $23.8 bn. By 2030, the cash flow relief would reach $29.4bn, plainly a good faith effort to respond to the current crisis. This equates to granting Argentina an eleven year default-free space in which the government can focus on implementing transformational economic and social policies with the support of the international financial community.

 Here is where it becomes important to distinguish reality from fantasy. As we all know, there is no such thing as a free lunch. Investors can understand exceptional circumstances, but after Argentina’s nine defaults (including three since 2002) it is easy to understand why there might be skepticism from creditors. This notwithstanding, their proposal is generous and responsive to the needs of the moment.   

 It is also important to highlight that concessions from creditors impact real people, not just financial institutions. A significant proportion of the pool of international capital invested in Argentina is derived from pension schemes, educational endowments, foundations and charitable trusts. Creditors managing this money have a fiduciary duty to make investment decisions for the benefit of their beneficiaries, which include some of the most vulnerable in society, as well as a vast array of employees around the world who are saving for their retirement.

 In drawing up workable solutions to the current crises, there must be clear recognition of the crucial role commercial investors will play in assisting Argentina out of the current crisis and beyond. The obvious question is where the capital will come from to fund the government deficits and private sector investment going forward?   The IMF’s balance sheet alone will be enough to save Argentina, particularly considering its current exposure. Regaining access to the international markets as soon as possible with be critical for Argentina’s future prosperity. Picking an unnecessary and ideologically-motivated fight with creditors, as Argentina’s experience during its last two sovereign defaults has shown, will achieve nothing.

 It is reassuring that Argentina’s lenders and investors have accepted the need to provide substantial breathing space to the country in light of the pandemic. But Argentina has to be realistic and play its part, particularly given the gap between the government and creditors is very narrow.  The country’s focus should be on fixing its immediate economic problems, and to then move forward.

 For Argentina, there is no time to waste - it must seize the current opportunity to reach a reasonable deal with its creditors and avoid further unnecessary distractions and delays.