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Eric Lalo is head of sovereign advisory at Rothschild & Co. Before that he was co-head of the Sovereign Advisory Group at Lazard, where he advised numerous sovereigns and sovereign owned entities including Argentina in 2004. In this post he argues that Argentina is a good illustration of the inherent conflict facing any sovereign issuer wishing to avoid a hard default, while also landing a sustainable debt restructuring operation with international private sector creditors. If creditors snub its last offer, then the country should accept a delay agreeing terms with them until later this year at the earlier, and instead turn its attention to negotiations with the International Monetary Fund.
Months into talks, Argentina and its private-sector creditors remain locked in negotiations over a restructuring of $65bn-worth of foreign currency debt. The next deadline for agreement falls on Tuesday, August 4 but Buenos Aires is rumbling with talks of a two-to-four week extension.
The country has already shifted its position considerably. Between April 21 and July 6, it improved the recovery value offered to creditors by more than 34 per cent (or about 14 percentage points) to 53.5 per cent in terms of net present value using a 10 per cent flat exit yield. Argentina also included a Minimum Level of Overall Participation of 50 per cent for consummation of its last offer – a condition which cannot be waived.
The last offer was nonetheless rejected on July 20 by the three creditor groups, holding out for a recovery value of 56.5 per cent. The creditors also claimed in late July that global financial institutions representing 60 per cent of the exchange bonds and 51 per cent of global bonds – the two categories of debt instruments in question – supported their counterproposal. That, of course, means that the Minimum Level of Overall Participation set by Argentina cannot be reached – essentially scuppering the latest offer from the debtor.
For students of sovereign debt restructuring history, the possible failure of Argentina’s attempt to restructure its debt preemptively will come as no surprise. Experience has shown that – with the exception of the €270bn Greek restructuring operation of 2012 – large debt relief for sovereigns tends to only come in scenarios where the hard default predates the negotiations, or when the risk of a hard default is perceived to be high due to a stubborn sovereign. This is clearly not the case as Argentina’s current administration has repeatedly indicated its intention to strike a quick and consensual debt restructuring with foreign creditors.
Argentina is, however, adamant its latest offer is definitive and represents the largest effort that the country could sustain in a difficult and deteriorating macroeconomic environment.
With the coronavirus continuing to weigh on output across the Americas and caseloads failing to diminish as quickly as hoped in many places, that macro environment looks only set to worsen. But that may prove a blessing in disguise for Argentina as a failure to reach a deal with creditors during August would – unless the outlook improves substantially – enable it to redesign the sequencing of its debt negotiations strategy. The rationale is that a worsening economic outlook would be taken into account in the design of a new program with the International Monetary Fund, to which Argentina owes $44bn.
How does this affect the negotiations with private creditors? To understand this, we need to look at how the parameters of Argentina’s commitment to the Fund are likely to change. The parameters of a new program with the IMF will not only take into account the new macro environment, they will also lead to a new full-blown realistic Debt Sustainability Analysis by Fund officials. A renegotiation with the Fund will also offer possible funding and protection under the 1989 Lending into Arrears – or LIA – Policy, as Argentina is clearly in a position to demonstrate that it made all possible efforts to negotiate in good faith with creditors.
A reopening of the negotiations at a later stage, under an active new IMF Program, but conducted under a default of the $65bn debt owed to private creditors therefore looks more attractive.
Deferring negotiations with private creditors until the fourth quarter of 2020 or the opening three months of 2021, would mean living under default for six to nine months. That is clearly far from ideal.
However, with the pandemic continuing to cloud the outlook, what ought to take priority for Argentina is to negotiate a new programme with the IMF – an institution fundamental to the restructuring process for sovereign debtors internationally for 40 years. Others, after spurring Argentina’s advances, should now be made to wait.
Argentina: restructuring in the time of Covid-19 – FT Alphaville
Pari passu: The force awakens – FT Alphaville
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