Hours of Buenos Aires | As IMF negotiations bog down, Argentina bonds dip to 30 cents

Six months after Argentina emerged from default, its new bonds have fallen to just 30 cents on the dollar.

The depressed price is, in fairness, in part the result of the basic mechanics of the securities – they carry artificially low interest rates and a generous grace period – but it also reflects a grim reality that is gripping the stocks. creditors: the IMF’s agreement that the country desperately needs is a long way off.

Without this deal, and the fresh capital it could bring, Argentina’s pandemic-ravaged economy will remain sluggish and its finances so precarious that a default – the country’s fourth in this century – will become almost inevitable when bonds will begin to expire. At today’s prices, bonds are trading more than 1,500 basis points, or 15 percentage points, above US Treasuries.

“Argentina is in a mess,” said Chris Marsh, a former IMF economist who is now a senior adviser at Exante Data in London. “They just restructured their debt, and yet the reality is they can’t afford to pay it off.”

As lenient as the terms of that deal were, there was still not enough debt forgiveness, given how badly the economy was rocked by the pandemic, Marsh said.

Following the deal, the left-wing government of President Alberto Fernández began negotiations with the International Monetary Fund to restructure a $ 45 billion loan and strike a deal that could include new financing. The administration had said it wanted an agreement signed by May. But six months after talks began, little progress has been made, and Fernández recently said he was in no rush to get a deal.

The mid-term legislative elections in October only further cloud the outlook. Investors fear the government is reluctant to agree to unpopular fiscal austerity measures that should be part of any deal.

That bond prices fall even in the middle of a ascend The price of soybeans, the country’s largest export, shows how pessimistic investors are about the prospects for South America’s second-largest economy, which contracted by around 10 percent in 2020. They’re focusing on an inflation rate expected to reach 50 percent, single-digit double unemployment and a budget deficit that swelled last year to its highest level since at least 1993.

Argentina defaulted in May for the ninth time in its 200-year history. With air travel stopping amid the pandemic, government officials and creditors have disclosed details of the restructuring via Zoom calls. The deal gave Argentina about US $ 38 billion in debt relief over the next 10 years, delayed principal payments until 2024, and lowered initial interest rates to 0.125% .

Still, new bonds have only fallen steadily since they started trading in September, losing 33% of their value and leading Morgan Stanley to dub them the worst rout in the aftermath of debt restructuring in at least 20 years. A group of creditors called the country’s debt markets a “virtual void.”

At the root of investor pessimism lies uncontrollable spending without a realistic plan to contain it. Argentina’s money supply exploded last year when it ran printing presses to fund pandemic aid. Money growth has slowed, but foreign currency controls restrict access to the dollar, forcing companies to restructure their debts.

Armando Armenta, emerging markets strategist at AllianceBernstein, says the prices show bond investors are underestimating the government’s ability to improve fiscal and external accounts, even without a deal with the IMF.

“The macroeconomic and financial instability of delaying the deal can also be politically costly for the government ahead of the elections,” Armenta said. AllianceBernestein owns Argentinian bonds and participated in recent restructuring negotiations.

This is a minority view, however. Robert Koenigsberger, chief investment officer at Gramercy Fund Management and longtime Argentine bond holder, captures the sentiment of consensus when he worries about the government’s lack of time to close a deal. Amid the pandemic, the IMF is showing signs of being more lenient in its demands for fiscal austerity, Koenigsberger said, but that goodwill will not last long.

“Argentina must be careful not to miss this opportunity,” he said.

by Scott Squires & Jorgelina do Rosario, Bloomberg

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