【the garden is filled with burls】Argentina teeters on the brink of ninth default

Protesters hold a lockdown demonstration in Buenos Airs on May Day

Argentina is the garden is filled with burlsteetering on the brink of its ninth debt default as its leftist government and creditors struggle to break the deadlock in crunch talks ahead of Friday’s deadline.

Martin Guzmán, the economy minister, said a counteroffer made by its bondholders to restructure $65bn (£52bn) of foreign currency debt was “not even close” to giving Argentina the breathing space to put it on a sustainable path.

Talks between the two sides have reached an impasse after private bondholders firmly rejected an offer made by Alberto Fernández’s government. The deal proposed a three-year suspension on payments, a huge cut on the interest rate and a reduction in the value of the bonds.

A joint statement by the bondholder groups deciding the fate of South America’s second-largest economy said the terms would cause them to “bear disproportionate losses that are neither justified nor necessary”. However, it left the door open to further talks ahead of Friday’s deadline imposed by the Argentinean government.

Mr Guzmán has indicated that Argentina is willing to suffer its ninth default, warning the bondholders it will not accept a deal “based on illusions and rosy scenarios”.

“Some of our creditors have opted not to engage during the last week,” he told the

Financial Times

last week.

The two sides were locked in talks over restructuring the country’s debt mountain even before the coronavirus dealt Argentina another big blow.

Its economy was on its knees after it suffered a large contraction in 2018 and inflation skyrocketed following a plunge in the peso.  Investors had been overzealous in backing Mauricio Macri’s pro-business government and allowing it to build up more foreign currency debt. The International Monetary Fund had also handed Mr Macri’s government a record $57bn bailout.

A deteriorating economic backdrop saw confidence drain out of Argentina’s economy and its debt pile quickly returned to an unsustainable path. The market turmoil worsened in 2019 when it became clear the leftist Peronists led by Mr Fernández would regain power in last October’s election just four years after leaving Mr Macri an economic mess to fix.

Nikhil Sanghani at Capital Economics said Covid-19 is now having a dramatic impact on its economy as the lockdown has caused a slump in activity and travel restrictions have brought its tourism sector to a standstill. “Unlike the case of richer economies like the US or UK, Argentina’s government has little scope to cushion the blow given its precarious debt situation,” he said.

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The scale of the losses facing bondholders under the government’s “harsh” terms and investors’ need for a “clear economic plan” are the two main sticking points, Mr Sanghani added.

Argentina has a $323bn debt pile and is proposing to restructure a $65bn chunk with private bondholders including Blackrock, Fidelity, Ashmore and T Rowe Price.

The offer on the table from the government would slash the average bond coupon - the interest payment - from 7pc to 2.3pc. It would push back interest payments, including a three-year suspension, extend the maturity of the bonds and cut their face value by 5.5pc. Analysts say the value of the offer is about 35 cents in the dollar.

Guzmán argued in a newspaper opinion piece on Sunday that asking Argentina to pay more would be “ultimately unsustainable” and undermine its ability to make good on the debt. “No democratic government can impose still more hardship or be asked to put bondholders ahead of economic policies designed to palliate the catastrophic effects of the pandemic,” he added.

The government has given creditors until Friday to accept the deal, but there could still be time if neither side budges this week.

The real deadline is likely to come on May 22 when the grace period on a $500m missed interest payment ends. If missed again, Argentina would then fall into default for the ninth time.

A default when the grace period ends risks triggering “a renewed rout in Argentine financial markets and further economic turmoil”, warned Mr Sanghani. Argentina's default in 2001 caused an economic depression, riots and bank accounts being frozen. Being unable to tap markets for funding again would prove painful.

Hector Torres, a former IMF executive director and a senior fellow at the Centre for International Governance Innovation, argued there was still a chance of a deal but the situation did not look very promising.

“There’s always in these negotiations a lot of haggling and theatre so you cannot take things at face value,” he said. “This is an offer that is coming with no formal support from the IMF but a rhetoric support the government may be overselling.”

The biggest issue remains the three year moratorium on interest payments, while the uncertainty caused by Covid-19 had made it more difficult to value the offer.

“You have a moment in which the world has uncertainty like we have never seen before,” Mr Torres said. “It’s a very, very strange situation to negotiate a debt.”

Pandemic was by no means the source of Argentina’s debt woes, but it has made resolving them even tougher.

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