ARGENTINA: Provincial bond snare avoided but bigger tests lie ahead

Buenos Aires provincial Governor Axel Kicillof announced yesterday, 4 February, that the province will make a USD 250mn bond amortization payment after failing to convince enough bondholders to accept his proposal to delay the payment (originally due on 26 January) until May. Kicillof’s climbdown narrowly avoids the province defaulting on the BP21 bond. Bond spreads narrowed by over 6% following the announcement. The motivations behind Kicillof’s BP21 proposal remain unclear. The governor could have had President Alberto Fernandez’s blessing to test creditors’ resolve ahead of the “main course” of broader debt restructuring negotiations. Equally, Kicillof may have acted independently, perhaps assuming that central government would bail out a province that is “too big to fail”; if that is the case, Kicillof badly underestimated both Finance Minister Martin Guzman, who swiftly ruled out any bailout, and miscalculated wider provincial political dynamics. Kicillof may also have calculated that he could burnish his credentials in the province, where he has a difficult relationship with many local mayors supposedly on his side, by trying his luck on the bond issue. Whether the outcome of the whole BP21 episode was reached by design or accident, Kicillof created three weeks of unnecessary distraction and costly noise at a sensitive moment. By making payment after previously saying the USD 250mn was “unpayable” (and then singling out one creditor in particular for its “intransigence”), the governor’s limited credibility suffers a further blow, while probably making future restructuring plans for his province more difficult. Putting these considerations to one side, the failure of Kicillof’s all-or-nothing approach is a net positive. As previously discussed, a sub-sovereign credit event (triggered by non-payment of a relatively modest sum) at this stage of Alberto Fernandez’s presidency would have transmitted very negative signals ahead of the broader debt restructuring negotiations. Moreover, it is clear that aggressive negotiating tactics have their limits when deadlines prove to be soft and sweeteners are added, and in the context of collective action clauses (CACs) requiring high thresholds for acceptance. As we suggested, and contrary to what Kicillof claimed, the episode was ultimately less one of capacity to pay and more about willingness. In contrast to Kicillof, Guzman’s stock remains relatively high, even if that largely reflects a lack of detail in the new government’s macroeconomic – and particularly fiscal – plans and debt offering. Guzman’s meeting yesterday with International Monetary Fund (IMF) Managing Director Kristalina Georgieva was full of positive noises and niceties, but little detail. That may begin to change from next week as Guzman presents the broad outlines of his plans to Congress next week and an IMF delegation arrives in-country. However, a concrete offer to creditors is not due until the second week of March, according to the government’s timetable. This timeline points to one of the main doubts hovering over the incipient process: the government’s very ambitious timetable to achieve a resolution. Fernandez wants the restructuring wrapped up by 31 March. One of the lessons of the BP21 episode is surely that – while time pressure can focus minds – complex negotiations with multiple stakeholders also require realistic timeframes.

February 5, 2020

ARGENTINA: Provincial bond snare avoided but bigger tests lie ahead

BY Nicholas Watson

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February 5, 2020

ARGENTINA: Provincial bond snare avoided but bigger tests lie ahead

BY Nicholas Watson

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More by Nicholas Watson

COLOMBIA: Tax reform detonates major political crisis

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CHILE: Another populist lurch as government beaten on third pension withdrawal

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