Kicillof says Buenos Aires Province can't afford to pay debts

Axel Kicillof, the new governor of Buenos Aires Province, today warned he doesn’t have enough money to meet debt obligations and pay salaries over the next month, comments that could be a first shot at creditors bracing for a restructuring.

Kicillof, a left-wing economist who gained notoriety earlier this decade when he oversaw the federal government’s contentious negotiations over defaulted bonds, said there were just 25 billion pesos (US$417.9 million) in provincial accounts, but that he needs 40 billion pesos to pay debt and salaries over the next 30 to 35 days. Another 50 billion pesos is owed to companies for public infrastructure projects, prisons and other provincial services, he added.

“With that debt and those obligations, the figure that’s been spoken of is insufficient,” Kicillof said in a speech from La Plata, the province’s capital. “The province has the willingness to meet its debt commitments, but needs to have a sustainable debt structure.”

Investors have feared the province’s bonds could be the first overseas obligations to default amid a nationwide economic crisis that compelled federal policy makers to warn they will need to restructure debts to push back maturities. President Alberto Fernández also said at his inauguration yesterday that the country wants to pay its debt but can’t under current circumstances.

“As Alberto said, if we don’t grow, we can’t pay,” Kicillof said. “We’ll get in touch with bondholders immediately and establish a dialogue to find a solution to this problem.”

Buenos Aires Province bonds denominated in dollars reversed small gains after the governor’s comments, with notes due in 2021 slipping less than 0.1 cent to 54.6 cents on the dollar.

'Unsustainable'

The beaten-down price signals a 50-percent chance that an interest payment due January 20 won’t be made, according to Alejo Costa, the chief strategist at BTG Pactual Argentina.

“Kicillof’s speech suggests he sees the debt as unsustainable, and that he may look to gain time to grow and propose some kind of haircut,” Costa said. “That confirms they’ll seek a restructuring.”

The governor also criticized the previous administration’s push to take on debt in foreign currency even though the province, home to about 40 percent of the country’s population, gets its income in pesos. With 82 percent of the debt denominated in dollars, the province must make US$8.8 billion in payments on those obligations over the next four years, he added.

In the speech, Kicillof also added that he will look to formulate a 100-day emergency plan to address the province’s finances, high utility fees and a slowdown in production. He said he would scrap a rise in electricity prices that his predecessor had authorized to take effect from January 1.

“The province has a dollar debt,” he said. “But it also has a health debt, a labor debt, a production debt.”

The only solace for investors might be that they had anticipated a restructuring for months, ever since an August election primary signalled broad support for Kicillof and his allies.

“It’s certainly not great when you have such a big, important province in trouble, but that one’s been well telegraphed,” said Ray Zucaro, chief investment officer at RVX Asset Management in Aventura, Florida. “Everyone knew it was going to happen.”