Argentina begins to restructure $101bn of debts


Argentina has begun the process of reorganising its towering debts, after falling into a technical default that hit bond prices and the currency on Friday.

Buenos Aires announced on Wednesday that it would postpone $7bn of payments on its short-term local bonds for up to six months while it pushes for a “voluntary reprofiling” of $50bn of longer-dated debt mostly owned by foreign investors. The government also said it plans to delay repayment of $44bn of loans from the IMF.

Argentina has already defaulted on its debt eight times, twice since the turn of the millennium.

The reorganisation prompted Standard & Poor’s to issue a “selective default” rating on the country’s $101bn of debts on Thursday, though it added in a press release on the move that the default had been “cured” by new terms applied to the short-term bonds and would be lifted on Friday.

Argentina’s finance ministry cast the default ruling as a technicality. The new payments schedule it published on Thursday went into effect on Friday.

The decision to delay repayments came after President Mauricio Macri’s government failed to sell new short-term bonds, leaving it struggling to find the cash for hefty upcoming repayments. Some $30bn in debt falls due this year alone, according to Capital Economics.

“Following the continued inability to place short-term paper with private-sector market participants, the Argentine government unilaterally extended the maturity of all short-term paper on August 28,” S&P said in its statement. “This constitutes default under our criteria.”

S&P also said it was lowering Argentina’s long-term rating to CCC-minus due to risk of a further default.

The board of the IMF was due to meet informally on Friday afternoon to discuss the crisis, but no immediate decisions were expected affecting the Fund’s $57bn rescue package for Argentina. Meanwhile, investors are still awaiting more detail on the governments plans for its medium and long-term debt, which is now expected to be presented to Congress next week.

Jim Barrineau, head of emerging market debt at Schroders, said implementing changes would be “extremely problematic because we have a political vacuum right now” and no one “with authority to negotiate with the IMF and bondholders in a sustainable way now”.

Argentina’s bonds and currency have slumped since Mr Macri — who had been a popular figure with international investors — suffered an unexpectedly heavy defeat in a primary election which all but ended his hopes of re-election in October.

Those losses deepened following S&P’s announcement. The peso fell more than 2 per cent to trade at 60 pesos per dollar. Argentina’s dollar bond maturing in 2021 slipped to a price of just 42 cents on the dollar, down 8 per cent on the day, pushing its yield to over 70 per cent.

The country’s 100-year bond, which had been snapped up by investors just two years ago amid a wave of optimism over Mr Macri’s economic agenda, fell to 38 cents on the dollar, a fall of 6 per cent. Government debt maturing in 2026 and 2028 also slipped below 40 cents on the dollar.

At those levels, investors say a default is already priced in, given that 40 cents on the dollar is within the range of estimated recovery value of the bonds. Much depends on the planned economic policies of opposition candidate Alberto Fernández — who is slated to win the presidential election in October — as well as the relationship he seeks to maintain with the IMF.

Two of the big three rating agencies lowered Argentina’s credit rating after the primary result. The resounding victory for Mr Fernández, whose running mate is former president Cristina Fernández de Kirchner, stoked concerns about the return of populist policies. Two weeks ago, Fitch lowered the country’s long-term issuer rating by three notches to CCC, while S&P cut its own rating to B-minus.

The further action by S&P makes it the first agency to label Mr Macri’s debt plans a default — despite the government’s attempts to describe the arrangement as “voluntary”.

The agency said: “The heightened vulnerabilities of Argentina’s credit profile stem from the quickly deteriorating financial environment, the absence of confidence in the financial markets about policy initiatives under the next administration — elections are not until October — and the inability of the Treasury to roll over short-term debt with the private sector.”

It added: “This has immensely stressed debt dynamics amid a depreciating exchange rate, a likely acceleration in inflation, and a deepening economic recession.”

S&P is not alone in warning about another default. Carlos de Sousa at Oxford Economics said he sees Argentina’s debt as “too high to be deemed sustainable, even under optimistic assumptions”. For this reason, he said the next government will be forced to undertake another restructuring.

A CCC-minus rating means debt is “currently vulnerable to non-payment and is dependent upon favourable business, financial, and economic conditions” for the borrower, according to S&P’s ratings schedule.

Additional reporting by James Politi


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