If you have to restructure the debt, let it be like Ukraine

From the opposition and in the midst of the election campaign, it was foreseeable that several politicians had warned of the difficulties to be resolved in time and with the payment of interest and amortization, once the aid of the International Monetary Fund would have been exhausted by the end of 2019. (IMF).

It is also understandable that the government of Cambiemos, economic leaders insist that the financial program is healthy and stress that it will not be necessary to redefine the debt. The IMF authorities also collaborated, excluding the possibility of converting the reserve credit into a program of extended facilities, extending the terms of 4 to 10 years and granting a financial boost to the country.

In fact, beyond the results achieved to balance the primary deficit, the Treasury's financial plan provides very strong badumptions for achieving the 2020 target. For example, Minister Nicolas Dujovne estimated that next year a primary surplus of 1 of GDP, equivalent to about $ 5,000 million, an objective to which many private economists have put a big question mark.

The fact is that debt service, including interest and depreciation, amounts to $ 37.9 billion in 2020, according to figures presented to the IMF in the memorandum of understanding. To this is added another amount of US $ 9,696 million, corresponding to other net capital outflows.

The data that may vary are those related to sources of financing: private turnover, trade balance, direct external investment and contributions from international financial institutions. The only sources more or less predictable for next year are the refinancing of debt in the hands of the public sector ($ 7,593 million) and the reduction of international reserves ($ 6,048 million).

All, government and opposition, have made it clear that in case of victory in the presidential elections, the country would not go to default. But beyond the laudable aspiration, it will be necessary to see if, in the absence of new private financing and the persistence of financial imbalance, the country will be able to meet its obligations in a timely manner.

To avoid default, the exit in this case goes through the agreed restructuring with the creditors. As Ukraine did in 2015. It is the variant that badyzes the market and what international finance experts suggest as being the most appropriate for Argentina.

The Ukrainian case

The Kiev government has used all the available options: withdrawal of capital, extension of conditions with grace period, increase of the interest rate and issuance of a growth-linked loan, similar to the PBI coupon used by Argentina in 2005.

The creditors have not accepted capital reduction of more than 5%, while Ukraine was aiming for a size of 40%. The participation of the International Monetary Fund (IMF) was essential to be in the middle, agree a discount of 20%. The Multilateral Credit Agency intervened not only as a lender, but also as a strategic ally of the country and mediator between the government and the 4 major investment funds that held the lender. essential obligations of Ukraine.

The Fund's Board of Directors approved a $ 17.5 billion reserve program in 2014, with an immediate disbursement of $ 5 billion. The Ukraine was quickly found in trouble and could not comply. This is why the Board of Directors agreed in March 2015 to convert the program into an Extended Facility Agreement (EFF), provided that private creditors accept a debt restructuring that would make it viable, according to the parameters of the Fund.

IMF officials have met with representatives of investment funds to explain the benefits of accepting reprogramming with new conditions. The main thing of all: avoid defects. The negotiations lasted 4 months.

Another key element of the Ukrainian case is that it occurred almost simultaneously with the UN's decision to impose a limit on the actions of vulture funds, such as those that have been brought against Argentina. The request had been made by the Government of Buenos Aires, after the legal odyssey that was crossing the country with the extinguished judge of the New York District, Thomas Griesa and the Appeals Chamber of the Second Circuit, at the request vultures from the Elliot bottoms. Management, NML Capital and Aurelius Capital Management, to recover defaulted bonds issued under New York law.

The UN resolution contains two provisions aimed at strengthening the limit on holdouts that were already operating with the so-called clbad action, or collective action clause, whereby a certain percentage of accession to an agreement is reached any actions of the minority that do not accept the terms are blocked.

1) A sovereign state has the right to develop its macroeconomic policies, including the restructuring of its sovereign debt, a right that should not be countered or hindered by abusive measures.

(2) The decision of the majority must be respected in case of debt swap, in order to prevent a minimum number of creditors from being able to act against a restructuring and to favor the seizure of a country's badets, such as embbadies or ships.

For example, Russia has not accepted the terms of the agreement reached at the time by the majority and the debt of $ 3 billion held by Moscow is the only one that remains unpaid. Something like a flaw that Kiev was not responsible for. The key was the participation of the IMF and the UN resolution, which avoided the figure of inflexible creditors. With a little delay, Russia has finally accepted the new conditions.

The restructuring agreement was concluded with the four major private creditors, Franklin Templeton, Black Rock, PIMCO and Fidelity funds. The first two are also the major holders of Argentine sovereign debt, an experience that, in the event of renegotiation, would greatly facilitate the proceedings.

The Ukrainian restructuring consisted of:

A reduction of 20% of the capital of the guaranteed debt; this removes the fact that it was not capricious, but a percentage that reduced the debt-to-GDP ratio (80%) to such a level (71%) that it made possible the economic recovery of the economy. Ukraine and guaranteed debt sustainability. Today, according to the IMF, this ratio is 68.8% and it is estimated that it will fall to 56.4% in 2022.

Extend by 4 years the maturity of each sovereign security that expires between 2015/2023 and 2019/2027.

Coupon interest rate increased from 7.2% to 7.75% per annum.

The issuance of a growth bond, similar to the Argentine PBI coupon, which would trigger payments from 2021 to 2040, provided that two conditions are met: annual economic growth of 3% and GDP nominal does not fall below a minimum level

When doubts arose about Ukraine's payment possibilities and the country confirmed the need to restructure its debt, the parity of short-term bonds fell sharply to 50% and the country risk was catapulted from the figure. from 1,000 basis points to more than 3,500 basis points. This is only when the agreement with private creditors was announced that the panorama began to normalize and that in a few months, the exchange rates were trading around 80%, while the risk country stabilized below 800 basis points. Today, the G EMBI that develops J.P. Morgan has on average 500 points and Ukraine has been able to return to the voluntary debt market.

The IMF had reason to actively participate in the negotiations. The first: he had already disbursed part of the loan. The second: to prevent the internal political crisis and the armed conflict with Russia in the east of the territory undermine the independence of Ukraine.

The case of Argentina is somewhat different, even if it has similarities. Country risk is between 900 and 1,000 basis points. The default insurance (CDS) is greater than 1,100. Short bonds yield over 19% per annum in dollars. The economy is in recession and inflation is slowing down. There is no war, but it is no secret that Washington's politics and New York's finances raise concerns about the country's return to a form of populism at beyond the end of the next presidential elections.

The IMF has reason to be involved here too. It has reached an agreement worth US $ 57,000 million, which represents 61% of all outstanding loans granted by the agency and which, at the end of the year, will have disbursed more than 80% . It will surely require conditions to turn the stand-by position into a FEP, which does not provide more resources, but extends the repayment schedule from 4 to 10 years. Among these conditions, it is emphasized that it will insist on pension and work reforms.

And the investment funds too. They know that if they support, sooner or later they will win. The same people who formed the committee that negotiated in Kiev are those who would sit with officials in Buenos Aires in case restructuring is needed. They have already verified that the default was not a company and that despite the reduction of 20%, this agreement allowed them to recover the capital invested in Ukrainian bonds.