Argentina bonds are trading as if the pandemic never happened

Argentina’s debt accord has left the nation’s bonds trading at pre-pandemic levels, even as the country lacks the outline of a credible economic plan to get itself out of the current deep crisis.

The country's famous century bond issued in 2017 reached as much as 46.93 cents on the dollar this week, the highest since early February. It has rebounded 2.4 cents since the debt deal was struck on Tuesday.

For some, that makes little sense. Argentina is facing an economic contraction of about 12 percent this year, and a deficit that has ballooned with the extra fiscal spending to fight the pandemic. Unlike other Latin American countries, which have also seen their debt rebound, Argentina has rampant inflation, limiting the scope for monetary policy to pull the economy out of recession.

“This isn’t hyperbolic. This is the worst negotiated sovereign restructuring I’ve ever seen,” said Diego Ferro, formerly of Greylock Capital Management LLC, now founder of M2M Capital in New York. “Investors got a massive freebie on this one.”

Part of the problem was that the restructuring accord was based on an economic assessment conducted with the International Monetary Fund before the pandemic. Those parameters for the economy no longer apply.

The fiscal deficit totalled more than US$3.4 billion in every month in the second quarter, up from just US$62 million in January. Moreover, new cases of the coronavirus and deaths are hitting record highs, even as much of the country remains in lock-down.

“How can everyone be so certain this is the right deal when you still have the economy closed?,” said Ferro. “Someone got taken in.”

Printing money

The government’s response to the pandemic garnered widespread support among the population, but has many economists worried.

“President Alberto Fernández has presented old recipes to address old problems, and we all know how that ends up,” said Patrick Esteruelas, head of research at Emso Asset Management. “They’re relying on the printing press, increasing money supply and creating significant inflationary pressures.”

A slump in the currency has been avoided by strict capital controls, which in turn have crimped imports and the economy.

How Fernández plans to escape the quagmire is unclear. The nation desperately needs to grow its international reserves, combat inflation that is expected to surpass 40 percent this year, and reignite the economy.

Yet, Economy Minister Martín Guzmán said Tuesday that the government has no intention of presenting an economic plan any time soon. For Ferro, the whole process has been done backwards.

“The logical way was to ask for a standstill, have an agreement with the IMF, come up with an economic plan,” Ferro said. “Restructurings are usually an afterthought to having an economic program. You don’t make the restructuring the cornerstone.”