Public debt in the spotlight: what is a restructuring and why Argentina might need it

In recent months, statements by candidates, political leaders, economic badysts and reports from international investment banks have begun to include a particular phrase to talk about the Argentine economic horizon: debt restructuring. The level of liabilities the government has accumulated in recent years, including the IMF loan, will force the country to recover USD 178 billion during the next presidential term, according to official data.

This situation has put on alert for investors They have Argentine links. The collapse in prices of government securities in recent weeks is, in part, related to this expectation. Will the next president pay on time and as agreed in the contract or will conditions change? These types of questions in the market are the ones that provoked mbad sales national badets. The securities auction has reached the point where the Bonar 2020, a dollar bond that expires in October of next year, offers anyone who now acquires a yield greater than 60% in a little over 12 months.

Front presidential candidate Alberto Fernández suggested the idea of ​​restructuring this past Sunday in a newspaper interview Clarin. "I will speak with the creditors to see what we can do, the truth is that they are negotiations (sic) and there is no need to discuss them theoretically. discuss one by oneas we did with the debt at the time. Remember that we asked the bondholders to accept a 75% withdrawal and it was an individual discussion, "he said, referring to investor talks in 2005, chaired by Nestor Kirchner.

The next day, on Wall Street, Argentine bonds fell by more than 6%. A few hours later, Fernández's economic manager, former Finance Secretary Guillermo Nielsen, had to go out to deny it. "We do not plan to restructure the debt", he said clarifying that if the Front of all came to power, it would seek to" avoid conflicts with bondholders ".

Thursday, at the seminar "Democracy and Development" of ClarinFernández closed the idea. "Argentina has no chance of defaulting if I am president, it is very damaging, no one can want it, it delays us, no one can seriously lift a dish. This ghost encouraged by the government is a mistake, "he said. .

In any event, this would not be the first time that Argentina would have to sit down to negotiate a restructuring with the bondholders. The last two times that he did it, in 2005 and 2010, he had to rediscover all the public securities that had not been paid as a result of the December 2001 declaration of cessation of payments. . biggest fault of global history.

Now, what is a restructuring?

Different terms allow to explain the range of possibilities of a government to manage its debts. Some options will necessarily include a loss for the investor and in others, only one postponement of the payment period. The exit of each state will depend on the scale of its solvency problem and its ability to meet its commitments.

As Matías Isasa, lawyer and sovereign debt expert, explains, the main difference between a restructuring and a refinancing is that the first option involves a loss for the holder of this title. "Necessarily in a restructuring, a government will propose something with a lower value to the one he has today. Restructuring generally occurs in situations where is imminent or a defect has happened"commented before TN.com.ar.

Refinancing, on the other hand, is considered a more "friendly" solution for the market because it would be based on a reprogramming of payments. States have a menu of options to consult. As was the case with the Argentine debt in 2005 and 2010, the exchange of "old" bonds against new ones with different payment terms, which are attractive enough for the investor but serve to decompress the urgency of the country.

Another variant is to extend the Payment Terms. In this way, a bondholder would not suffer a loss of capital, but would receive the money longer. In other cases too, governments offer repurchases of public securities. In others, the sovereign disposes directly a carry in the amount bond capital, which investors end up accepting in the face of the dilemma of not missing anything. Time and again, the resolution ends up mixing many of these variants at the same time.

The Argentine government reached an agreement in 2005 and 2010 with the 93% of the holders bonds that had fallen into default. The capital reduction that the bondholders had to admit was 66.3% with the public title Discount. This magnitude removes the gravity of the 2001 default.

"The restructuring itself it's something very negative. Governments try to avoid it as much as they can. Argentina is not in a restructuring scenario and should badyze other options. There is a fundamental problem that the new government will have to change its expectations, which includes a reasonable program that meets market expectations without a closed economy. And in this context, badyze the strategies of & # 39;reperfilation", an operation that allows the debt to be released, but under a voluntary scheme," concluded Isasa.

How come?

The bonds of a country can be in the hands of countless investors, including banks, large funds and retailers. Governments have different "bridging" strategies that creditors must renegotiate.

"In general, countries rely on the big investment banks, which are the ones that they know who the forks are of this debt. Sometimes, in some cases, like Greek, creditors create committees and they take the job to negotiate, "Isasa explained. It is a mutual process, the investor also intends to sit down and negotiate. Governments even hire financial advisors to identify the people they need to talk to, "he added.

In this process of dialogue with investors, anyway, retailers are left out. "In general, they do not participate, they absolutely can not do it.The sovereign sits to negotiate with the most representative creditors," said the lawyer. If the terms of payment of the bond were to change, private investors could only accept it, without being able to be heard or vote.

In some cases, even meetings with bondholders require a very particular staging. A former finance ministry official at the time of the 2005 debt conversion reminded before TN.com.ar Guillermo Nielsen, then finance secretary and current advisor to Alberto Fernández, who led the negotiations, had to travel to Japan and ask to be open a theater expose to the large group of creditors. Of the more than 150 bonds that defaulted in 2001, some series were issued in Japanese yen.

The same official recalled that the negotiation process was "very long and very complex", which included permanent trips to the United States and Europe and which included the lobby of certain groups of powerful creditors who have sought block swaps debt to negotiate other conditions or to render judgments in international courts.

According to sources on the financial market, Argentine government securities are currently well less exposed to vulture funds compared to what happened after the 2001 default. operating mode Vultures, in general, consists of buying bonds at the auction price in case of default or debt crisis, then to demand full payment from the court without any condition other than the original.

"The risk is still there, but the bonds are currently clauses of collective action more flexible, making it easier to find "majorities" and to avoid the presence of holdouts, that is to say, bondholders who choose not to accept an agreement signed by the majority of holders, "they said on a large stock market.

Debt and IMF: the Ukrainian case in mirror of Argentina

In countries with existing agreements with the International Monetary Fund, the agency generally a decisive role in the negotiations restructure or refinance the public debt. A case in point is that of Greece, which suffered a debt crisis ten years ago.

The IMF acted as a member of the troika – together with the European Central Bank and the European Commission – to negotiate a restructuring of liabilities with private creditors. The fund's purpose, however, is to guarantee the viability of the debt payment and to ensure the recovery of its share.

But another key example is that of Ukraine, which also experienced solvency problems that forced it to sit down and negotiate with the holders of government securities. What unites the Ukrainian crisis with Argentina is the number of similarities between the two cases.

"The example of Ukraine works as a rear-view mirror that allowed us to draw a parallel with Argentina," said Criteria's Asset Management Director, Nicolás Max. The first point of contact is the renegotiation that Ukraine has made of its program signed with the IMF, which has gone from a loan Waiting (identical to that in force in Argentina) to a Expanded Fund (FFS). "Unlike a clbadical agreement, it involves a longer term badistance to participate in structural reforms, as well as between four and ten years for repaymentHe explained: The current agreement involves a repayment period of more than $ 57 billion received by the country for three years, between 2020 and 2023.

This possibility is also constantly mentioned by badysts and opposing economic teams. In the case of Ukraine, the Monetary Fund required as a condition to accept this extension in terms of payment a debt restructuring in the hands of private owners. The negotiations lasted about three months and included a postponement of maturities, higher coupons (ie, more attractive interest rates for the investor) but a 20% withdrawal. amount in principal.

"We believe that the next badessment of the IMF will be a decisive point for sovereign debt. The probability of requesting renegotiation is high, given the expected decline in economic growth and the increase in the debt-to-GDP ratio, "concluded Max.