May 21, 2020

ARGENTINA: Heading towards default but settlement window may not be closed

BY Nicholas Watson, Alan Brazil

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The 30-day grace period on a USD 503mn interest payment on three bonds expires tomorrow, 22 May. Failure to pay would result in Argentina’s ninth sovereign default. At this stage, it would be a big surprise if a default is avoided. The government has indicated that it will not make the interest payment and has downplayed the importance of the upcoming deadline. The key question is whether recent signs of an accord between the two sides is enough to keep talks alive from next week and avoid bondholders seeking an accelerated payment of principal and interest.

The softening in positions seen in recent days has raised hopes that a negotiated settlement is now realistic; progress has been especially significant given the rejection rate of the government’s initial offer (over 80%). The fact that bondholder groups submitted three counteroffers to the government late last week was a sign that a constructive dialogue was finally underway. Since then, there have been media reports suggesting some bondholders would accept recovery values of around 50-55 cents on the dollar, which – if true – would put the two sides much closer on this aspect, even if there is more work to be done on levels of interest and the length of any grace period. The government’s position on the latter (the opening offer called for a three-year moratorium on payments) remains a particular potential stumbling block to any agreement.

If the momentum of talks means that the sovereign enters what has been described locally as a short-lived “soft default”, then additional negotiations would need to be efficient, i.e. start as soon as possible and reach a conclusion within weeks. If they drag on, the risk of litigation would increase, and the government would bump up against further payment obligations.

During this time, the domestic situation will only worsen. Preliminary data for March highlight how much pain the economy – already weakened by two years of recession – is currently under; March saw a year-on-year contraction in economic activity of 11.5%, when only ten days of the month were under quarantine. April is likely to see a further contraction of as much as 20%, and while the government professes optimism that May will see a pick-up following the loosening of restrictions, this may well be too upbeat; some areas (e.g. Cordoba) have in recent days reversed limited re-opening moves, while an extension of the quarantine to 7 June appears imminent. While the Covid-19 quarantine and its economic effects may appear to offer the perfect excuse to default, a block on market access would add to the economy’s multiple woes and make an eventual recovery longer and harder.

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