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Can Wall Street Trust Argentina Enough To Agree To A Debt Moratorium?

Argentina’s new government wants a two year breather on its yawning $56 billion+ foreign, dollar denominated debt, mostly all of it owed to the International Monetary Fund. Will investors be able to trust this new government to improve the economy enough to make payments starting in 2021?

If they do not trust it, then they will not agree to the moratorium and once again Argentina is at risk of default. No one but a vulture fund will want to touch it.

Anyone who invested in Argentina during the presidency of Mauricio Macri — who leaves office on December 10 — was happy to receive roughly 8% in annual interest payments. The money wasn’t a gift.

The debt was also used by the Argentine government, hardly run by poor men and women who can’t afford the shoes on their feet, to keep the state functioning. That means paying public workers too. No government money, no government jobs.

On Friday, New York economist Martin Guzman was tapped to be new president Alberto Fernandez’s Economic Minister. The market was waiting for this announcement. His plan for revitalizing the economy is dependent on a two year loan deferment for money owed to bondholders and the IMF. The moratorium avoids haircuts on bond principal, but may or may not include lower interest rates in order to make the debt more affordable.

As it is now, the IMF loan to Argentina, a record breaker, is unpayable.

Guzman said that he wanted a plan to be approved by March and herein lies the rub: if it is not approved, nobody gets paid. Argentina will default.

Most of the talk has been around the need for the IMF to endorse the Guzman proposal in order to assure a “friendly” deal with bondlords in New York and London.

“None of this sounds realistic,” says Siobhan Morden, fixed income analyst for Latin America at Amherst Pierpont Securities.  She thinks any debt restructuring plan would only be possible if views were aligned on how Argentina plans to pay it back in the first place.

The outgoing Macri administration did not bring Argentinians the planned prosperity they had voted for. So they have chosen Fernandez and his vice president, Cristina Kirchner, to give them some relief. That relief will come in the form of subsidies and price controls on everything from the currency to gasoline.

Current market prices for Argentina’s 100-year bond are vulnerable to the downside on the risk that Guzman’s plan fails, coupled with the reality of an economy going nowhere and an electorate demanding more spending.

Can Wall Street Trust Argentina Enough To Agree To A Debt Moratorium?

After Venezuela, Argentina is South America’s sorriest economy. Kirchner’s return to power, albeit … [+] as second fiddle, shows a country that has no ideas left and no fresh leadership. (Photo by Spencer Platt/Getty Images)

As of November 30, Argentina’s Treasury deposits were around $700 million at the central bank with four-times that owed to creditors in the near-term. 

Sovereign dollar debt repayments are not overly onerous at $4.4 billion next year and another $2.3 billion for state owned companies against the current $14.4 billion of liquid foreign currency reserves, which is an improvement from September reserves.  The real problem comes in 2022 when some $23 billion is owed to the IMF.

While the selection of Guzman as Economy Minister sends a clear signal of Fernandez’s endorsement of his view to defer debt payments out to 2022 rather than default, how this gets sold to Argentina’s investors falls on the president.

Can Wall Street Trust Argentina Enough To Agree To A Debt Moratorium?

Martin Guzman was designated as Economy Minister by Argentina’s President-elect Alberto Fernandez on … [+] Friday. (Photo by JUAN MABROMATA/AFP via Getty Images)

AFP via Getty Images

“The president-elect, once in office, will fill in the colors of Guzman’s outline, erase what he decides won’t fly, and will set up contingency plans if the necessary agreements are not reached by March or whenever Fernandez decides is the deadline,” says Kevin Ivers, vice president at DCI Group in Washington, a political risk consultancy working with investors. 

Many are focused on Guzman’s ties to economist and ex-World Banker Joseph Stiglitz.

Rumors in Argentina that Stiglitz will help Guzman lobby the IMF to accept the debt deferment are “largely a distraction,” says Ivers. 

“Anyone who understands Argentina will give the same advice: keep your eye on the ball, and the ball is Alberto Fernandez. It is not about what pressures, philosophies or influences Guzman brings to the table; it’s about what Alberto faces inside the tribe of Peronism,” he says of Argentina’s main political ideology. 

Of course a main ring leader in that tribe is his own vice president, Cristina Kirchner, who many believe is at least partially responsible for the mess Argentina is in today.

Cristina, a two-term president, practically closed Argentina’s economy for a number of years, making it harder for multinational companies to repatriate money back to the U.S. and elsewhere.

She also artificially inflated the value of the peso, installed numerous capital controls and subsidized the heck out of the economy.

When Macri tried taking that away, he was met with resistance from unions and had to back off. Unable to make the fiscal changes to the economy, he brought in the IMF for help. By his last year in office, he was no different than Cristina, back to using price controls in an effort to curb inflation.

Argentina is a quasi-socialist economy, surviving on the heavily dollarized portions of the economy — real estate, tourism, commodity exports, and wine.

“Fernandez must balance all the governors…the Argentina Industrial Union, (Brazil president and major trading partner) Jair Bolsonaro, his apparent love of regional left-wing mischief and,” says Ivers, “his need for Donald Trump’s good favor.”

The U.S. has the biggest position in the IMF and the most votes, with 16.5% of the total. That’s nearly triple China, another important Argentina ally, and eight times that of Brazil.

If Fernandez is going to play footsies with Venezuela’s ruling Socialists United and promote Chile-style social unrest in Brazil along with his friend and ex-convict Luiz Inacio Lula da Silva, then it gives Washington little incentive to save an economy run by those working against its interests.

Buena suerte, Argentina.

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