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What next after Argentina’s debt agreement

Potential holdouts, IMF and local debt are next on the agenda

By | [email protected] | August 6, 2020 4:18pm

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Argentina finally secured an agreement with some of the world’s biggest asset managers to restructure the New York-based tranche of its defaulted debt, totaling USD 65 billion, with Economy Minister Martín Guzmán and Blackrock, Ashmore, Fidelity and other giants simultaneously confirming the news this Tuesday following 8 months of negotiations.

The deal had been brewing for some time, so stocks and bonds did not rally much beyond a few hours of euphoria immediately after the announcement, but the government has already moved forward with the next step of its plan, passing a bill to offer a similar bond swap to investors currently holding Buenos Aires-based debt.

The country will now have to move on to negotiate with the International Monetary Fund (IMF), whose historic USD 50 billion loan to Argentina starts presenting big maturities during the second half of Alberto Fernández’s presidency, as well as dealing with the also massive peso-denominated debt issued by its Treasury and Central Bank, and presenting an economic plan that makes promises of economic growth and financial sustainability more material.

The agreement

The basic terms of the agreement were not too different from those of Argentina’s latest offer, with the country getting almost nothing in terms of capital write offs but a significant reduction with regards to interest payments.

Overall, the net present value of the deal has been calculated around 54.8 cents to the dollar, a figure reached after Guzmán and Blackrock’s Managing Director Jennifer O’Neil agreed to find a mid-point between the sides’ latest respective offers in a call conference over the weekend.

In addition, the government made some small concessions like moving forward the payment dates of the bonds by a couple of months, and offering some advantages in terms of the currency conversion rates that will be used.

A key sticking point of the agreement, the collective action clauses (CACs) of the new bonds, was also resolved after Argentina offered to change some aspects of the contracts, but the letter of the new prospects has not been revealed yet. CACs are crucial because they define the conditions under which a new debt-renegotiation can be triggered in the future, such as the majority thresholds needed to force new terms on all of the bondholders.

Minimizing litigation

Before Blackmore, Ashmore, Fidelity and the rest of the big players joined in, the Economy Ministry said that the holders of 35 percent of its New York-based bonds had already accepted its restructuring proposal. If those figures are true, and the largest bondholders are also roughly accurate in their claims to represent around 50 percent of the debt under negotiation, then the debt swap would have an acceptance of around 85 percent, higher than what former president Néstor Kirchner and his minister Roberto Lavagna obtained in Argentina’s 2005 debt restructuring.

Crucially, Argentina needs to trigger the CACs created after that 2005 agreement, as well as those written for the bonds issued by Mauricio Macri’s administration since 2016. Triggering the CACs would ensure that no holdouts are left behind demanding higher payment and potentially suing the country in New York, as it happened with a minority of bondholders left over from the 2005 agreement.

The CACs from 2005 are more demanding for Argentina, forcing it to get 75 percent of the holders of each series of bonds to agree to a restructuring, or 85 percent of the bondholders of all the series combined. The Macri-era clauses are easier on Argentina and will very likely be triggered, as only 66 percent of the bonds are needed to force a swap against a resisting minority.

To finalize the legal details of the agreement, Argentina has extended the expiry date of its offer to August 24. Results of the exchange offer will be published on August 28, and the final publication is expected for September 4, so a more complete picture of how the past and future CACs are resolved will be available in a months’ time.

IMF and other debts

The next step for Argentina will be to reach a deal with the IMF, which backed the country’s proposal throughout its debt re-negotiations, hoping that a haircut to private bondholders would make it easier for them to recoup the largest loan in the Fund’s history.

“The agreement over the foreign-law bonds was the hardest part of the re-structuring. Those holding local-law bonds are happy with the promise of equal treatment that Guzmán gave them in the bill passed yesterday, because generally they would have expected to get a more hostile treatment in Argentine courts. And the IMF does not need its money back urgently either, both Kristalina Georgieva and the representatives that the Fund has sent to deal with Argentina have shown flexibility, they don’t have a lot of incentives to stir trouble. The US representatives on the board might be the toughest negotiators,” Proficio Investment’s Rafael Di Giorno told The Essential.

According to Emmanuel Álvarez Agis, former Economy vice minister who leads the PxQ consultancy agency, Argentina has to play hard ball with the IMF in order to get the best deal possible, and it has some cards available to do so.

“There’s an element that has not been discussed much but which should be important, that even the main US official overseeing Latin America (Mauricio Claver) admitted recently, which is that the Fund authorized the loans against its own political rules. They did so because the US applied political pressure to support Macri’s re-election bid as he was closer to their interests. If the Fund did not respect its rules when it loaned the money, then Argentina can use this as a bargaining chip to say the re-payment should also be more flexible than what the Fund’s rules establish,” Álvarez Agis argued.

It is a tactic that Vice President Cristina Kirchner has already insinuated, suggesting that even if the sides eventually reach an agreement, there will inevitably be tension considering the contentious history between the country and the Fund.

Victory for Guzmán

Politically, the deal is a victory that Fernández’s team had been looking for after other failed economic proposals in an increasingly complex context due to the still uncontrolled pandemic.

When handing out praise for the deal his government reached, President Fernández mentioned his VP Cristina Kirchner and former Economy minister Roberto Lavagna, a centrist who ran against Fernández but has been an occasional ally of him in Congress. Fernández said both of them advised him to cede some ground to secure a deal in an adverse situation.

But the main winner is undoubtedly Martín Guzmán, an academic with no government experience who was picked for the Ministry due to his expertise in debt re-negotiations, which he studied in depth as a disciple of Joseph Stiglitz. Guzmán was repeatedly targeted by Blackrock and the opposition, with the former trying to go through backchannels to separate him from the talks, and the latter accusing him of being a rookie who did not understand the language of the markets.

With the deal under his belt, Guzmán now sees his political capital increase both within his ruling coalition and with market observers, and he will surely stay on board until the rest of the debt negotiations are finalized. But will he be the man in charge of a new economic plan, or will that task fall to Matías Kulfas, so far keeping a lower profile in the Ministry of Production?