By Mateusz Frączek | 11th December 2020
It is a common truth that no one likes making mistakes, especially repeatedly. However, a quick glimpse at the Argentina’s bond repayments history may guide you to a very different result. Throughout its two hundred and four years of existence, the country defaulted on its bonds 9 times, with the last delinquency occurring just a few months ago. What were the repayment terms Argentina negotiated with its bondholders and is the country still capable of restoring investors’ trust after all?
A few words of explanation first. Bond is a debt security used by both companies and governments to raise capital. During the time to bond’s maturity, the issuer pays regular interest payments to the investor, so called coupons. When the bond matures, the issuer also repays the bondholder’s initial investment, the face value. The present value of the bond is simply the face value and coupon payments discounted back to the present day.
Coming back to the main story, it was the 22nd of May when Alberto Fernández, the president of Argentina, announced that the country is not able to meet its $500 million repayments obligations. The negotiations quickly followed with BlackRock, the world's largest asset manager, representing the interests of the aggrieved investors. It was in theArgentina’s interest to reach a restructuring agreement too. Without it, the country could have been restricted in its access to foreign capital markets what would only deepen the current economic crisis experienced by the 2nd biggest South American economy.
In August, after almost 3 months of tough negotiations and rather rough exchange of views, the negotiating sides agreed for a deal. The final decision reached by the feuding parties offered the current bondholders the right to drop their existing demands in exchange for new, extended maturity bonds. However, the average coupon payments on the securities were reduced from 7% to only 3%, with no haircut in the face value repayments. As a result, the recovery value for every $1 previously put in by the investors became just 55p. Bluntly speaking, while Argentina’s government left the table with almost $38bn debt relief by 2030, investors lost 45% of the value of their investments. Nevertheless, all bondholders signed the deal.
“May we never again enter this labyrinth [of indebtedness], please” said Mr Fernández, summarizing the talks. Many may ask then, what led to such an insolvency of Argentinian government in the first place. As always in the world of financial markets and globalized economy, there are a few complex and interconnected reasons but there are a two key factors. One of them is the Argentina’s weakly monitored and leftist fiscal policy which prioritizes public spending and social initiatives over financers’ interests. According to the 2017 OECD report, only in 2015, Argentina’s public spending amounted to 44% of its GDP, by far the highest figure in the region.Second, Argentina’s USD reserves, from which it repays the foreign loans, were simply evaporating. After some upward rally at the end of 2019, when they reached over $37bn, in just 5 months to May 2020, they fell by over $1.4bn.
Despite its tough experiences, once the tensed negotiations are over and Argentina knows where its economic pitfalls lay, the country should only have a bright financial future in front of it. Such a debt relief package should also push the Argentinian bond prices skyrocketing as the country would not be tied with previous financial obligations. However, nothing could be further from the truth.
According to Bloomberg, despite “tightening restrictions to keep companies from using dollars to pay debt, raising taxes on dollar purchases for savers, increasing some local interest rates and cutting levies on agriculture exports”, Argentina is still burning its dollar reserves. No structural reforms, low savings levels and a persistent financial irresponsibility do not add any hope for a positive change. “To restore confidence, you need an implementation of macro programs that are consistent and technicallywell-thought out, with buy-in from politicians,” said Jorge Piedrahita,managing partner at Gear Capital Partners in New York. “I don’t see thegovernment working in that direction” he quickly added.
It is in the hand of the Argentinian peopleand government whether the country will get back on the right tracks andestablish itself as an international and reliable partner. Rather than livingfrom restructuring to restructuring, the governors should take a long-term,strategic approach of elevating the country out of the crisis and putting it onthe pedestal of South American economy. With its 45mn people and strongresource base, Argentina has the potential to truly reshuffle the global trade links,but it has to challenge its current approach if it really wants to.