At this point it already seems inexorable: Argentina would default on Friday. Unless Martín Guzmán turns 180 degrees and decides to pay the interest for USD 503 million. There is still a chance of this happening, but it is minimal.
In case of cessation of payments It should not be dramatic news: Government negotiations with creditors continue and positions are getting closer. Martín Guzmán himself stressed on Friday that “there is a positive dialogue” with the different groups of bondholders. A language that did not exist in the previous stage.
But despite these good omens for what is to come, reaching a majority agreement before the 22nd would be a true miracle. Banks ask at least 48 or 72 hours in advance for customers to indicate whether they accept or reject the proposal, so in practice there is no time to disclose a new proposal and that bondholders choose in just a couple of business days .
Basically counterproposals presented by creditors distinguish two types of bonds issued by Argentina. On the one hand those placed during the government of Mauricio Macri, from 2016 (they are in the hands of the large funds BlackRock, Fidelity and Templeton mostly), and on the other hand those issued in the exchange 2005 (there appear players like Gramercy and Fintech Advisory). All this represents an additional complication in the negotiations, since the latter are supposed to provide greater protection to their holders and therefore would be in a position to demand a better offer than the rest. However, that differentiation was not present in the original offer, which expired on May 8 and was later extended.
On Wall Street they think that negotiations could quietly extend into the third quarter or could even drag on for the remainder of 2020.
The so feared default could not have serious consequences and to a large extent it is already discounted. For now, there is no danger that creditors will decide extreme measures, such as accelerating debt or applying “cross default” clauses. If they do not take that path, only the three bonds that would be unpaid on Friday would formally default, but without effect on the rest of the debt. Only on June 30 the government has to face another interest payment: that of the Par and Discount bonds. But in this case there would also be an additional 30 days of grace to reach an agreement, that is, until July 30.
All investors’ eyes will be on Guzmán’s response. Will the original offer improve enough after the massive rejection it received? It is inevitable that this is an overcoming proposal that improves the “present value” of the new bonds. The issue is how far they would be willing to stretch.
Throughout the week, both the Minister and the President showed signs of being willing to negotiate. “We are not fools, we do not want default”Alberto Fernández declared. And Guzmán assured that he is willing to analyze all the combinations of capital drawdown, grace period and interest coupons suggested by the bondholders. As long as the “sustainability” of future debt is not jeopardized.
The IMF will be a key player in this process, although for now it has had little interference. However, the agency has already made it clear to the government that they support a restructuring, but they do not welcome a new default by Argentina.
The scenario of a total default, but with serious negotiations underway, is at this point the most desired. The option of defaulting and at the same time “kicking the board” of the conversations with creditors would obviously be much more complex.
The economic crisis generated by the quarantine played for and against Argentina when it came to negotiating. On the one hand, the request for a grace period for the payment of principal and interest sounds more reasonable. The economy will take time and take the backpack out of debt to recover. But at the same time the devastating effects of the pandemic on the activity compromise the Government much more, which would risk too much with a “hard default”, that is to say, stop paying and fight with the bondholders at the same time.
The price of uncertainty has already been very high. The free dollar rose more than 60% in two months, from $ 80 to more than $ 130. The exchange gap is already at 100% and the Central Bank continues to lose reserves despite the fact that it is going through the high season in terms of liquidation of the thick harvest. In between, the BCRA accelerates the issuance of pesos to go out and cover people and companies that went into deep crisis due to the paralysis of the economy.
Also, the economy is in free fall. In the United States, retail sales decreased 17% in April and it was a setback. But in Argentina the decrease exceeded 60%, that is, magnitudes difficult to find in other parts of the world. The latest estimates from consultancies and banks estimate that the GDP could fall double digits, or around 10%. A drop similar to that of 2002.
Going to a plain and simple default would represent a high risk for Alberto Fernández and the long three and a half years of his presidency. No arrangement in sight, the Central would continue losing dollars, while it will be forced to issue a mountain of pesos in the midst of the crisis. The worst combination. The danger of an inflationary spill would be just around the corner, along with an even greater increase in poverty and unemployment.
At Casa Rosada they are aware of these great challenges and they demonstrated this in the latest public statements.. The danger is being in limbo: going into default but continuing to negotiate without too much conviction. This would prolong the agony for a long time and the cost of the great uncertainty would create new havoc in the economy.