The government of Argentina says it cannot increase the value of its repayment offer to the country’s creditors because “we are not 100% confident that we can afford [what we have already offered].”
An unnamed government official tells Euromoney that the deteriorating economic and fiscal situation in Argentina – which has already suffered two years of recession before this year, when Covid-19 is expected to see a further 10% contraction of GDP – has complicated its ability to model the sustainability of its current offer, which is worth roughly 53 cents on the dollar.
“Argentina has implemented a fiscal programme [in response to the pandemic] worth about 3% of GDP, and we have seen a fall in revenues worth about 2% of GDP,” he says. “However, we didn’t change our proposal [to creditors] because we thought we had buffers to have a recovery. On the other hand, given where we are now, it’s maximum offer we can make.”
The official’s comments play to the growing views of many within the Buenos Aires finance community.
|Juan Manuel Pazos,
“The government and bondholders are both assuming that the Argentine economy is going to rebound in the coming years – that a $300 billion economy is going to become a $400 billion economy in the next five or six years,” says Juan Manuel Pazos, chief economist at TPCG Valores in Buenos Aires. “The elephant in the room is that the economy might not grow at all during this time. It might still be a $300 billion economy in 2025. In that situation, it doesn’t matter what the two sides agree today, because the government is not going to be able to pay.
“Even before the government put its deal on the table, there was no guarantee they would be able to pay.”
Nikhil Sanghani, Argentina economist at Capital Economics, also has doubts about the sustainability of any deal.
“We’re sceptical that the government’s latest restructuring offer would be consistent with restoring sustainability to Argentina’s public debt over the medium to long term,” he says. “After all, the nominal haircuts would be very small – around 3% on most dollar bonds – which would do little to reduce the large public debt stock. And the country’s debt dynamics are still very poor.
“Indeed, we expect a 10% slump in Argentina’s GDP this year, and only a very gradual recovery thereafter.
“That’s partly because the government would presumably have to pursue austerity measures to keep investors on their side if a debt deal is completed, which would hamper the economic recovery. What’s more, the peso is looking increasingly overvalued under the protection of capital controls, given the large spread between the official and unofficial exchange rates. And a necessary adjustment would put upward pressure on the FX-dominated public debt burden.”
Sanghani estimates that the government’s latest offer would stabilise Argentina’s public debt at around 100% of GDP over the coming years, rather than it continuing on an upward trajectory in the absence of a restructuring. But that is some way from the debt ratio falling towards 60% of GDP, which the IMF deems as consistent with debt sustainability.
View from the past
Pazos believes the creditors’ demand for a higher offer from the government can be explained by the fact that they are looking to the 2005 agreement as a baseline. Following that agreement Argentina grew rapidly – from a $270 billion economy in 2005 to $500 billion in 2008, while the government’s primary fiscal surplus remained unchanged.
“[President Néstor] Kirchner went from spending 30% of $270 billion to 30% of $500 billion – basically he was able to spend the windfall from the recovery,” he says.
Investors say they are keen not to lose out this time. However, Argentina was in a much better position in 2005 than today.
The country’s rapid fiscal deterioration in the last two months – matched by large falls in the unofficial, ‘blue’, exchange rate – indicate a challenging post-pandemic recovery.
The unofficial FX rate has fallen by about 77% since March 1, compared with just 18% for the official rate, leaving a discrepancy that has widened from 22% in March to 83% today.
“We have had these conversations with the creditors, and we’ve said to them that we don’t know if we can grow at a speed that would make our current offer sustainable,” says the official. “It’s a bet, but we think our offer is high enough to be fair to investors and not to be too high to mean that we will be back having these discussions with investors again in five to six years.”
I’m not sure that the government is concerned about debt sustainability more than it is about having a free hand for fiscal policy for the next four years
– An investor
However, one investor points to the structure of Argentina’s offer as one reason for their lack of comfort in its good faith.
“I’m not sure that the government is concerned about debt sustainability more than it is about having a free hand for fiscal policy for the next four years,” he says. “If they were concerned with sustainability, then that would imply restructuring with a stiff principal to cut the leverage ratio. If they were a corporate proposing to restructure its debt in such a way, it would essentially be saying: ‘I can’t generate any ebitda going forward, but we’ll keep the huge leverage.
“That wouldn’t wash.”
In response, the government official says the sovereign has proposed such a structure – keeping most of the nominal debt while targeting relief at suspending short-term payments – because it thinks the level of debt is manageable, while high interest payments are not, and never were.
“Creditors lent to a country that was prepared to pay a lot for their capital – between 8% and 10% – which means implicitly that there was risk in lending this money,” he says. “That risk materialised. Argentina cannot pay these rates.
“What we are saying to investors is that you won’t lose capital – we will pay you back – but not with the kind of interest rates that were agreed. That wasn’t sustainable. And if we get the economy on a sustainable path, you are not going to have risk [to your capital].”
The official says that the creditors’ position is illogical. He says that the country’s need to grow GDP to be able to make the current deal sustainable will necessarily require the country to grow exports – but investors rejected the offer to make repayments based on the growth of the export sector.
“In the short run, the elasticity of imports is higher than 2x, so if you want growth of between 2% and 3%, you need export growth of around 5% or 6%. That’s a huge challenge for Argentina.
“And yet the creditors, who say we were being too pessimistic with a model that had GDP growth of between 1.7% and 2% had no interest when we offered to include GDP warrants as part of the deal to pay them more if we have an excess of exports.
“Their response was: ‘That’s not going to happen – you won’t have higher exports’. But without higher exports we won’t have higher GDP, so why do they call us pessimistic?”
However, creditors point to issues surrounding GDP warrants included in the 2005 agreement – when the government was accused of manipulating economic data to avoid payment thresholds – as the leading reason to why they had no interest in such financial instruments.
There is rising confidence that the two parties – entrenched as they are – will overcome the final narrow pricing gap and outstanding legal issues and strike a deal. Both sides are motivated.
However, the official insists the government has moved as far as it is prepared to.
“We have been moving, we have shown goodwill and we have come close to their demands – but that’s it,” he says. “This is our maximum effort – and they always ask for more. We have a really high poverty rate – with more than 50% child poverty and more than 30% overall – we have many things to do. We need an agreement to move on with the more serious issues.”
He says the number one priority for the government is to address the country’s poor productivity.
To do that the country will need investment – and a pre-requisite for this vital FDI (which never materialised under the more economically orthodox administration of Mauricio Macri) will be a removal – or at least relaxation – of capital controls.
However, the official says he doesn’t foresee that happening any more quickly than “over a few years”, complicated as it is by the stubbornly high inflation and the wide discrepancy between the official and unofficial FX rates.
He also says the country doesn’t plan to return the international debt markets – even if there is a positive resolution to the debt negotiations – because the interest demanded to issue that debt would continue to be at unsustainable levels.
All this presents a challenge to the part of the economy generating dollars to meet hard currency debt. As long as that FX valuation gap persists there is going to be difficulty in generating the dollars needed to grow the economy.
The country is already returning to the perverse situation where it is, in effect, subsidizing the acquisition of imports and the purchases abroad of Argentine nationals.
Even if Argentina manages to get a settlement with the creditors, it is going to be in dismal shape
– Juan Manuel Pazos, TPCG Valores
“Rudi Dornbusch won a Nobel prize working in this area,” notes Pazos. “If Argentina fixes the exchange rate and pursues an independent monetary policy, then it will destroy its current account surplus – because the adjustment won’t come from the financial account, it will come from the current account.
“And if you don’t have a current account surplus, you don’t get any dollars – and no dollars mean no [debt] payments.
“Right now everyone is haggling over a couple of dimes in the short run and not enough focus is on the structural situation. Even if Argentina manages to get a settlement with the creditors, it is going to be in dismal shape.”