Covid-19 complicates Argentina’s impending debt restructuring
After the outbreak of covid-19, Argentina’s decision to delay presenting bondholders with an offer to restructure billions of its international debt did not come as a surprise to many. But local lawyers think the country must urgently take the bull by the horns if it wants to maintain access to international capital markets.
The Argentine government was meant to present a debt restructuring offer to bondholders on 13 March, as part of a broader plan to reach an agreement to restructure nearly US$69 billion of foreign debt before the end of last month. However, the government has shifted its focus to combat the spread of covid-19 instead and that deadline has now passed.
Of course, Argentina is not the only country having to re-evaluate: the covid-19 outbreak has turned the world upside down, forcing governments worldwide to reprioritise. Carolina Zang, partner at Zang, Bergel & Viñes Abogados, says the debt restructuring remains an important issue for the government, but adds that it is, logically, not its priority right now. “Well-being of the people is their first commitment. Restructuring a debt in this context would be extremely difficult,” she says.
Other Argentine lawyers are not surprised by the government’s decision to postpone the offer. Bomchil partner Tomás Araya says the debt restructuring’s timetable that was presented back in January by Economy Minister Martín Guzmán was too ambitious anyway. “The likelihood that the Ministry of Economy would have been able to comply with such a tight timetable was already low,” he says. “The oil crisis and the covid-19 events of early March practically turned it into zero.”
At the start of the year, before covid-19 hit Latin America, there were aspects of Argentina’s macroeconomic situation that were looking positive. Although the country has been combatting high inflation rates for years, the monthly inflation rate in February was down to a comparatively low 2%, a reduction from the 2.3% observed in January. February’s rate was the lowest inflation has been since July 2019. The government had also tried to reduce its fiscal deficit by raising taxes.
Those small streaks of light are now being overshadowed by covid-19. The government must now increase spending to pay for urgent social measures caused by the outbreak, but it remains uncertain how the government can increase spending while presenting creditors with a viable restructuring plan. Javier Magnasco, partner at Beccar Varela, believes increased spending will be difficult without restructuring the debt. “We must bear in mind that the country has almost run out of its Central Bank reserves, it has no international credit, [it has] an internal banking system that is already pushed to its limits in government lending, and there is no room for further tax pressure,” he says. “The alternative,” he adds, “seems to be to turn on the money printers once again, but that won’t bring much enthusiasm either given the current inflation rate.”
While the country is in lockdown – currently in effect until 12 April – the government is having to think of a solution to its international debt problem. There is no plan set in stone yet, but it recently announced it will present some guideposts and continue talks with creditors during the next few weeks. Summing up the opinion of many in the business community, Pérez Alati, Grondona, Benites & Arntsen (PAGBAM) partner Diego Serrano says the key is to avoid default and find an alternative solution to restructuring the entirety of the debt right now. He says the government could start by scouting the market to see who might support this route, whether that’s the IMF or bondholders. “With the IMF’s support and by using some of the country’s reserves, Argentina might, and if it wants, be able to meet payments for this year and restructure early next year,” Serrano says. “A default would close the financial markets for Argentina and trigger cross defaults and other adverse consequences for Argentine companies,” he adds.
It remains to be seen how likely the current government is to seek the IMF’s support. Former President Mauricio Macri struck a US$57 billion financing deal with the fund in 2018 – the largest in Argentina’s history – but the country has a long and difficult relationship with the bank.
Some think that it is unrealistic to attempt to restructure such a large portion of debt under existing circumstances. Marval O'Farrell Mairal partner Fernando Hernández outlines another approach. He refers to a government filing before the US Securities and Exchange Commission (SEC) in mid-March outlining an authorisation to request the registration of up to US$69 billion debt in portions. Simultaneously, the government requested a registration to issue, sell or exchange up to US$31.6 billion worth of new international bonds. “The government’s strategy is not yet clear as no formal offer has been made, but the filing of a registration statement before the SEC for the offer of new international bonds in an amount equal to less than 50% of the bonds to be restructured may be a way of testing the waters or a plan to restructure in stages,” Hernández says.
But covid-19 may make appealing to investors harder than it might otherwise have been. The unprecedented outbreak of the virus has caused paralysing uncertainty and investors are less likely to make risky investments. “Unfortunately, the conditions may not be favourable for seeking new money for making a cash tender offer or to get large discounts in an exchange offer,” Hernández says.
Lawyers agree that it is important that creditors are presented with a sustainable macroeconomic plan, including a primary fiscal surplus. But they warn against taking too long to assemble this, saying a long-term delay and default should be avoided. “Though the bonds subject to restructuring include collective action clauses that prevent solitary claims before US courts, an indefinite delay to place an offer may call in some unwanted players like vulture funds and that, as we all know, is another game,” says Beccar Varela’s Magnasco.
Argentina will not want a repeat of its recent experience with so-called vulture funds. Following its default in 2001, the government restructured most of its debt in two rounds in 2005 and 2010. But a small group of hedge funds did not agree to the restructuring and their dispute with the state did not settle until 2016, when Argentina finally regained access to the international capital markets.
Argentina’s is not the only government left with little space for financial manoeuvre as a result of covid-19. Others are also feeling the pinch. In such an unprecedented scenario, PAGBAM’s Serrano says there is a chance creditors could potentially be convinced to take a larger share of the burden. “But, realistically, I believe the outbreak will certainly worsen the likelihood of a swift and smooth restructuring,” he says.
Neither will the outbreak help Argentina out of its ongoing recession. The IMF predicts a 1.3% GDP contraction in 2020, but that is likely to worsen as a result of the virus and its accompanying economic shutdown. In particular, the lockdown will take a toll on the millions of people that are part of the informal economy and need to work to secure their income. If Argentina’s access to international financial markets is suspended as a result of its inability to restructure its debt, the scenario will only get worse.
Argentina has faced boom and bust cycles before and has proven capable of weathering the storm in the past. “Controlling the covid-19 spread while passing relief measures to avoid the country’s economy stopping are the only goals of President Alberto Fernández,” says Bomchil’s Araya. Earlier this year, Fernández managed to unite businesses and unions with the government to send a joint message to creditors that they must let the country grow before it can pay its debt.
Lawyers are remaining optimistic about the outcome of that plan. “The government is not in an easy position right now, but we have faith that they will do the best they can,” says Carolina Zang.
At the time of publishing the Argentine government had still not announced a formal restructuring plan.