Six months after it launched a debt restructuring offer, Argentina’s largest province, Buenos Aires, appears no closer to an agreement with its bondholders. Several other provinces are making very slow progress in talks, and — in the absence of amendments to rescheduled payments — the number of regional governments entering default is increasing. Mendoza remains the only province to have successfully wrapped up a deal.
In August, it appeared Argentina had done the bulk of the hard graft when it came to debt negotiations. After a painstaking process, it finally managed to persuade several different creditor groups to accept terms on the rescheduling of $65bn of bonds. Provincial talks, many of which involve just one small international bond, should be a relative formality.
For now, bondholders are patient. There has been little talk of accelerating payments or taking legal action against defaulting sub-sovereigns, as investors realise that a drawn-out legal battle would suit neither issuer nor creditors. The government — for all its gamesmanship during sovereign debt negotiations — ceded enough ground to strike a deal.
If Argentina is serious about rebuilding its economy, it cannot have the lingering risk of provincial defaults over its head. Yet the national government is only harming this process.
Less than two months after they went free to trade, Argentina’s restructured dollar bonds are offering yields in the range of 15%-17%. This is remarkable given that the debt exchange lowered the debt stock, coupon rates, and effectively granted the sovereign a three year repayment holiday. By comparison, Ecuador, which struck a similar deal at the same time, has seen its bond yields close in on 10% — despite the looming risk posed by presidential elections in February.
These yields are problematic for provincial debt talks. Many of the provincial issuers rely on federal transfers for revenues, meaning that even provinces with strong credit metrics traditionally trade at a pick-up to the sovereign. If the sovereign is yielding 17%, the assumed exit yield on the weaker provinces could be well north of 20%.
The whole point of a restructuring is to put an issuer’s debt on a sustainable footing but this is not a sustainable cost of funding for any issuer.
Moreover, once bondholders start to calculate net present value recoveries using such an exit yield, it becomes an ugly game. Bondholders are reluctant to take big losses on issuers that, for the most part, do not have large enough debt stock to justify huge haircuts.
Argentine bond yields are so high because of the government’s poor macroeconomic policy. Rather than using the leeway provided by the restructuring to attempt to fix the major structural issues facing the economy — such as a gap of more than 100% between the parallel and official exchange rates — authorities have opted for short-term solutions, including tighter currency controls, over politically difficult policies. There is not even a whiff of a plan for fiscal consolidation.
One bondholder group took the unusual step of publicly criticising the government even after negotiations were done and dusted.
Not only have the authorities “failed to restore confidence”, but “policy actions taken in the immediate aftermath of the debt restructuring have dramatically worsened the country’s economic crisis”, said the Exchange Bondholder Group last week.
“Rather than allowing prices to achieve equilibrium and stimulate desired economic activity, the central bank has reinforced an exchange rate policy that promotes imports, discourages exports and has depleted reserves to a dangerous level,” said the group.
Bondholders gave Argentina much payment relief despite the lack of clarity regarding how the government would take advantage of the leeway they granted. With the shocking performance of the exchanged bonds, they have paid a heavy price. It is therefore unsurprising that creditors are loathe to be so kind to the provinces.
Argentina’s provinces do need some debt relief — just like the sovereign did. But the country also needs an economic plan that recognises its fundamental issues, no matter how unpopular that might be. If the government does not offer the latter, it cannot expect bondholders to grant provinces the former.