German Ríos, professor at the IE University, former director of Strategic Affairs in Madrid at CAF-Banco de Desarrollo de América Latina and our Senior Partner in Intelligence and Analysis, analyzes the agreement with foreign private creditors in Argentina and its implications for the country’s future.
• The Argentine government and foreign private creditors reached an agreement (to be ratified in the coming days) to restructure the country´s debt of about $65 billion.
• Savings close to $30 billion in 10 years are estimated. The principal does not experience significant changes (the haircut will be 1.9% or US$1.230 million), but the average interest drops from 7% to 3%. If savings from restructuring debt under local law are added up (the government sent to Congress a project giving equal treatment to creditors under foreign and local legislation) the total will reach US$42.5 billion over five years.
• Net present value (VPN) at a 10% discount rate is US$54.8 cents per dollar, for every US$100 in face value of the original titles (from US$53.5 in the second official proposal to bondholders). To reach the final agreement, the government did not change the capital haircut or interest rates, but advanced the payment dates within the same budget years.
• It is important to note that under the agreement the maximum interest payment is delayed until about 2030, so that the deal buys time for the country to grow and generate foreign currency.
• To close the agreement before the August 26 deadline, one of the controversial points is to define legal terms related to the clauses of collective action. Foreign private creditors would not want the final conditions of the new bonds to facilitate a new restructuring of the debt in the future.
• From now on, the government will have to focus on renegotiating its debt with the International Monetary Fund (IMF), and designing and implementing a credible economic plan that ends the economic recession of the past two years, which has been exacerbated by the pandemic in 2020.
Analysis
Although it has taken several months, reaching an agreement on debt restructuring under foreign legislation are positive news for Argentina. This was made possible by the IMF support and the lower confrontational attitude of investment funds compared to vulture funds, the main players in previous restructurings. In addition, the pandemic and future economic projections of the world economy facilitated minister Guzman’s work.
However, reaching an agreement with the IMF, Argentina’s largest individual creditor is a different story. First, there are big differences between the economic visions of the two sides. Second, the IMF (and several actors in the country) claims that the country has not presented a credible plan to reduce the fiscal deficit and to promote long-term sustainable economic growth. Third, the political differences between President Fernández and the more radical wing of Peronism (led by Vice President Cristina Fernández de Kirchner) can hinder the negotiation. In this agreement, the IMF will require Argentina to implement structural reforms, such as reducing public spending and/or raising taxes, initiatives that will be politically difficult for the Fernandez administration to adopt.
Argentina has to grow and generate foreign currency to pay its debt in the future, implying that in a context of fiscal restrictions, it will have to place significant productive bets. Despite not having an explicit economic plan, the government has insisted on the revival of SMEs and agribusiness as spearheads of medium-term economic growth. However, this will not be easy in the context of COVID19, where the government’s main strategy has been extreme confinement, which has caused a deepening of the economic recession. Indeed, Argentina, along with Venezuela, will likely show the biggest GDP declines in 2020. Public spending to keep families and businesses afloat during the pandemic has increased the fiscal deficit, which will become an obstacle for the productive strategy. The end of this agreement is just the beginning of a complex new process, where room for manoeuvre will be limited to boost production and growth.
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