"We must avoid another megachannel" | Martín Guzmán adv …

"I just learned that they issued a hundred-year bond paying a rate of 7.9%. It's a barbarity and a bad deal. It is unsustainable. If they do not change, this story could end well, "said Martín Guzmán in an interview with Page / 12 June 25, 2017, in full enthusiasm of the "market" with the government of Mauricio Macri. The story ends very badly and Guzmán now launches a new warning: "The government is likely to send to Congress a bill facilitating the acceptance of the repayment of foreign currency bonds issued under foreign law. of the government. an increase in the interest rate compared to the instruments of origin. It would be something similar to the 2001 megacanje, which involved so much interest for the country that it led to more fiscal austerity and a lack of payment ". Guzmán is a researcher at Columbia University, a close badociate of Nobel laureate Joseph Stiglitz and an expert on public debt issues, financial crises and defaults.

"There are four ads. The first is the supposed involuntary reperfilation of short-term bills. In reality, it is a selective defect, because reperfilation always results from a negotiation between two parties and, in this case, it is a unilateral amendment payment terms. The second announcement concerns the intention to begin negotiations to restore debt with private parties under local law, for which congressional intervention is necessary. The third is the reperfilamiento of the debt with the private of foreign right. And the fourth is the declaration of an attempt to reprogram the debt with the IMF, which this government is not necessarily able to do, but it will be next, "orders Guzmán announcements Tuesday.

Selective by default

– What is the government looking for with the selective lack of local securities and what impact can it have on the domestic financial market?

– The goal of this measure is to immediately generate more calm exchange rate. The selective defect is made on instruments in local currency and under local jurisdiction. The alternative was to issue pesos to meet the deadlines, but this could affect the exchange rate because the holders would use them in dollars. The BCRA could contain this effect by selling dollars, but would continue to lose reserves. Then they choose the default value. This decision provides the government with financial relief, but it can also result in costs. One of them is that the risk rating agencies decide to clbadify Argentina in a situation of selective default, which would further affect the country risk. Although Argentina is already outside the external debt markets, the fact that the price of bonds continues to decline significantly increases the opportunities to purchase part of the vulture funds, which do not co-operate then not in renegotiation processes.

Risk of Megafield

– Can reperfilation of obligations lead to a situation similar to that of mega-trading?

– The government has announced the sending to Congress of the bill so that reperfilation is possible. This must be seen very carefully. The risk is that the government sends a project facilitating the exchange, that is to say facilitating the acceptance of the exchange by the creditors thanks to an increase of the interest rate. interest in the initial instruments. It would be something similar to the 2001 megacanje, which involved so much interest for the country that it led to more fiscal austerity and a lack of payment. It is essential that the Argentine company maintain its protective mechanisms in order to prevent any further mega-trading from being possible.

– What are these protective mechanisms to avoid a new megafield?

– Argentine law is ambiguous as to the conditions to be met by the State during a debt swap (which includes the possibility of reperfiling). The law refers to changes in principal value, interest rate and conditions, and the way it has been interpreted is that, in order to effect an exchange, the state must obtain improvements in at least two of the three goals. conditions. That is what we have to defend, because there is a risk that the government will send a bill to Congress that gives it a lot of latitude to proceed with the exchange and then uses it in the same way as the government of Canada. the Rúa in 2001.

– How was discretion used at that time and what was the result?

– It has been used by improving delays but increasing the rate compared to the original emissions. De la Rúa's argument was that the rate agreed on the mega-market was lower than the market rate at that time. But the rate at that time was the default rate, so it was irrelevant for practical reasons. Now the same thing happens, because the current market rate is unimportant, this is not a reference, Argentina can not be funded at this rate. What needs to be clear is that the rebalancing must be done without raising the interest rate compared to the rate of the bonds originally issued. If the government met one condition (deadlines) and not at least two (deadlines and fees) to improve conditions in the country, we would face something similar to megafield. The suspicion has to do with the fact of the bill, because the government could go to the exchange with an extension of the terms and an infinitesimal reduction in the interest rate without going through the Congress. We need to see if the government is seeking to have more discretion through a congressionally approved law to effect an exchange that fulfills only the term condition, ie with a rate increase.

– What would be the interest of creditors to accept the extension of the term without increasing the rate?

– The incentive for the bondholders is to avoid the default. No creditor in good faith wants the default. For the moment, the government proposes that there is no withdrawal of capital, known as debt restructuring, which is more difficult to achieve but which is currently not lifted. neither by the government nor by the opposition.

– Could vulture funds be reused?

– Currently, there are more guarantees, because a good part of the debt includes clauses of collective action. In other words, if a certain percentage of acceptance is reached, the demand extends to the total number of holders. But the country is not totally immune because the clauses applying at the level of each link, they are not added between different links. In other words, this risk still exists.

MFIs

– Is this a necessary condition for the representative of the private bondholders to succeed in reprogramming the agreement with the Fund?

– First, reprogramming is a problem for the next administration. According to the status of the IMF, disbursements can not be made in a situation of obvious non-viability of the public debt and at current market rates, this is the situation. It is then understandable that one seeks to modify the terms of payment with the private conditions in order to renegotiate the payment schedule with the Fund.

– Is this also a condition for the disbursement of $ 5,400 million?

– There is a lot of ambiguity and lack of transparency about the necessary and sufficient conditions for this disbursement. It is possible that the proposal to modify the payment profile is necessary for the continuity of disbursements, but I do not think that this is a sufficient condition.

– Why would the IMF accept renegotiation?

– The central point is to change the basics of the plan because the initial program laid out a series of fiscal and monetary objectives that deepened the problems of Argentina. The current government itself recognizes the failure of this plan, in that it is unable for the economy to generate dollars to meet the deadlines. It is this same government that states that it does not face payments. It is obvious: the economy has not stabilized, does not generate more resources and is a reality that concerns both parties. The fund was one of them. Faced with this failure, both parties must reprogram.

– What should the renegotiation of the agreement be based on?

– The central point is that to stabilize the Argentine economy, it is necessary that the level of activity recovers. The reformulated program must be based on a central resumption of economic activity. And this will involve a change in the macroeconomic program, both in the fiscal and monetary components. It is clear that recourse to the Fund entails a loss of degree of autonomy and sovereignty. But the next government, not the IMF, is to propose a new macroeconomic framework. The next government has the task of managing this loss of autonomy. For the current government, it is impossible, it does not have the political capacity to do it.

– How do you explain that the IMF is again a partner in the debacle of the Argentine economy?

– This agreement was mainly a political commitment in favor of Mauricio Macri's government. It turns out that the lack of understanding of the situation on the part of the government and the IMF was too important. The technicians of the Fund were instructed by the delegations sent by the Argentine Government. And the failure of the Fund and the agreement is as resounding as the failure of this government in general.