SHORTLY AFTER coming to power in December last year, Alberto Fernández (pictured), Argentina’s president, said the country was in “virtual default”. With the economy shrinking, the currency tumbling and poverty rising, the country’s debts had become impossible to sustain. In April his government delayed payments on dollar liabilities issued under Argentine law. And on May 22nd the republic missed a deadline to pay $503m in interest on dollar bonds issued under New York law. It marked Argentina’s ninth default since independence in 1816. The virtual became real.
In principle, bondholders could now band together to demand immediate repayment of the remaining money they are owed. They could also pursue Argentina in the courts. After Argentina’s seventh default in 2001, the legal chase lasted 15 years and covered some unlikely terrain, including the seizure of a 100-metre Argentine naval vessel docked in the Ghanaian port of Tema.
But the government seems confident that its latest default will prove brief and “soft”. Its efforts to persuade creditors to swap their bonds for new, less onerous securities would continue until June 2nd, it announced. “The question is not if we get a deal, but when,” said one source close to the president. “Call this an impasse, a soft default if you wish, but a final settlement is in the making.”
What would a deal look like? The government has asked bondholders to accept a small cut (5% on average) in the principal amount owed to them, combined with a large cut (62%) and a long delay in interest payments. It has proposed paying nothing at all until 2023 (an election year) and nothing substantial until 2026, pushing the bulk of its debt service beyond the end of its first term.
This was not an enticing offer to creditors. Deferred payments are worth less to investors than early payments, and doubtful payments are worth less than certain ones. If investors could be sure that Argentina would keep its promises, they would discount future payments at a modest 0.5-1% annual rate, equivalent to what they could otherwise earn on risk-free American Treasury bonds. But lending to Argentina is anything but risk-free. Some analysts think its future promises should be discounted at a rate of 10%: so a $1 payment a year from now is worth less than 91 cents today.
At such high discount rates, the government’s original offer was worth less than 40 cents on the dollar. A counter-proposal from a group of bondholders, including Blackrock, a giant asset-management firm, would be worth around 60 cents, according to some estimates. The speculation is that an agreement could be reached somewhere in between: if the government’s offer could be improved to 50-55 cents on the dollar.
The new optimism reflects an important shift in command and control over the past week. Mr Fernández initially left negotiations in the hands of his young economy minister, Martín Guzmán, who worries that early repayments will impede the economy’s recovery (and that a robust recovery is necessary to ensure reliable repayment). If creditors discount Argentina’s future promises at excessively high rates, they must think the country is at risk of another default. But if that is so, then presumably the government needs more debt relief not less.
But in recent days Mr Fernández, a veteran of the brinkmanship that accompanied Argentina’s debt-restructuring in 2005, has insisted that default must be avoided at all costs as he confronts the coronavirus pandemic. Mr Fernández has put his country under a stringent lockdown for almost nine weeks, in sharp contrast with Brazil and Mexico. The number of dead and infected in Argentina was low enough to allow some easing measures this week and remains well below the catastrophic figures in those countries. “Fernández is imposing himself on the debt crisis, as he did on the pandemic,” according to Sergio Berensztein, a political analyst.
Those with access both to the government and the bondholders voice cautious optimism. “It will take weeks, but Fernández recognises he has to concede ground now and put money on the table,” said one source in Washington. “The real negotiation starts now, just as the word default comes into play.”
The third party with sway in the negotiations is the Argentine “street”. Unlike the historic default of 2001, which was applauded by a majority of the public, today most Argentines say they want a settlement. “I lived through the last default,” said Ramiro Monzón, a shopkeeper in downtown Buenos Aires, lamenting the “for sale” sign on the shop next door. “I never want to repeat that.”