Foreign investors in Argentina try to read default runes

LONDON (Reuters) – Argentinian sovereign debt has not been kept for sensitive souls, but the government's announcement of a debt restructuring plan prompted investors to closely assess the likelihood country returns to a complete default.

Argentina's holdings fell after President Mauricio Macri suffered an unexpected electoral loss in the primary elections this month, in the hands of populist-minded Peronist Alberto Fernandez, as the central bank was forced to burn its reserves to support a peso in trouble.

Unable to recover a large portion of its local debt in the short term, Treasury Minister Hernan Lacunza announced on Wednesday his intention to extend the maturities of local-owned bonds held by institutional investors and announced his intention to do so on international debt and on debts owed to the International Monetary Fund.

Short-term debt of about $ 7 billion, long-term debt of $ 50 billion, and $ 44 billion of IMF debt are about to be revised, according to calculations by the investment firm developing markets, Tellimer.

The country of 44 million inhabitants is not foreign to the defaults of payment. The last big one in 2001 plunged Argentina into years of recession and economic crisis from which it came out in 2015.

The current proposal – which has yet to be approved by the Congress – envisages extensions of maturity, but no haircut or reduction of the principal.

However, investors do not agree on whether a complete default is now inevitable, if the planned revision will cure the ills of Argentina and what may be suffered by the holders of obligations of international law .

Hontao Jiang, of Deutsche Bank, said the proposed measures could work if the country faced only a liquidity crisis, but this was unlikely given the questions about its solvency.

"Make no mistake, it will be a failure to pay Argentina's external debt," Jiang predicted in a note to customers. "Whether this announcement is in itself a default that triggers CDSs (credit default swaps), we are not certain, but if such debt transactions take place, it would be a default and this would trigger CDS. "

CDS, a means of insuring the risk of default, has exploded more than 2,000 basis points since the main vote on August 11, and implies a probability of default of about 50% over the next 12 months. This probability exceeds 80% over the next five years.

GRAPH: 5-year credit default swaps in Argentina – here

The peso lost 22% of its value against the US dollar during the same period and the depreciation of the currency accentuates the pressure not only on the repayments but also on the viability of the outstanding debt.

Deutsche calculates that Argentina's current gross debt has increased to about $ 325 billion, or 103.5% of its annual gross domestic product as a result of the depreciation of the currency.

"Even if all debt maturities are extended, with no minimal cuts to reduce the stock of debt – especially the stock of external debt – this will not solve the solvency problem," he said. Jiang added.

Deutsche calculates that the markets currently provide for a 30% nominal discount if the exit yield is 12% and 10%, respectively, in a scenario where all international bonds denominated in dollars and euros are exchanged for 15-year bonds. with a coupon of 6.5%. and 5% – corresponding to the average coupon of existing bonds in these currencies. The output yield is the market forecast of the value of sovereign bonds after a restructuring.

BNP Paribas had calculated earlier in August that Argentine debt holders could face a 40% discount, although the range of potential write-downs ranges from 38.6% to 62.7% depending on the scenario.

Argentina has long been on the list of high-risk countries: in June, BlackRock ranked it 57 out of 60 countries on the basis of sovereign risk index measure factors such as willingness to pay, margin budget, the health of a country's financial sector and its external financing situation. .

This ranking places Argentina just above Venezuela, Lebanon and Egypt.

GRAPHIC: BlackRock Risk Indicator – here

The government's latest strategy was facing a multitude of risks, said Diego Pereira, J.P.Morgan.

"Pressures on international reserves could persist," writes Pereira in a note to clients, adding that this could come from withdrawals of foreign currency deposits and dollarization, even if the extension of maturity would leave some respite to the Treasury.

The reaction of debt holders under Argentine law is also unclear, especially if Congress only deals with the local debt resizing bill after the October elections, said Pereira added that the IMF's reaction had also been "cautious".

GRAPHIC: Argentina's foreign exchange reserves – here

Still others claim that with bond prices falling to around 40 cents for some key Eurobond issues, holders of international debt securities may not get their haircuts .

"It's one of the toughest, least managed, most unpredictable and most messed up countries in the world. It has one of the highest failure rates of any country in the world, "said Jan Dehn, head of research at Ashmore Group.

"If we are willing to bear the volatility, it is because we think that Argentina is sustainable."