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ECONOMY | 06-03-2020 15:37

Argentina faces catch-22 on peso debt bomb after swap tradeoff

The local debt of 1.8 trillion pesos (US $29 billion) is an amount roughly equivalent to all the cash in circulation in the country.

Argentina’s latest debt dilemma is whether to pay or delay its local peso debt.

While the country’s billions of dollars in foreign debt with private creditors and the International Monetary Fund have been the primary focus for investors, the nation now faces a hurdle that’s just as large: the almost 1.8 trillion pesos (US $29 billion) in local debt maturing this year, an amount roughly equivalent to all the cash in circulation in the country. And while the fact that it’s in pesos should have lessened the burden, Argentina is finding it tough to refinance.

The government will be faced with its latest Catch-22 on Friday, when a 25 billion peso (US $400 million) payment comes due. That’s after the country swapped 65 percent of the original maturity this week, in an operation that implied a 15 percent haircut for those who participated. Here’s the bind: If Argentina pays the full amount, investors who agreed to the swap may think they took a loss for no good reason if they could have just held on to get all their money back. If Argentina unilaterally pushes back the payment—something it’s done with other maturities— it risks angering those bondholders and further eroding trust in a battered local market.

It’s a trade-off that will continue to play out as the country tries to roll over its local debt, according to Martin Vauthier, director of Buenos Aires-based Eco Go consultancy.

“Whatever decision they make will have a high cost, so it’s all about picking the lesser of two evils,” Vauthier said. “Until there are indications of how the country will restructure its dollar debt, this is going to keep happening with each debt maturity in pesos.”

The risk of more unilateral delays in the country’s local peso debt is at the forefront of investor’s minds since the government decided in February to push to September 30 a payment of another maturity—the so-called Dual Bond—after a first swap attempt flopped and a second attempt was declared void. With that decision, the government also said it wouldn’t be held “hostage” by investors demanding better terms in the swap.

Analysts agreed that the swap for the Dual Bond was a tough sell for investors because the securities implied losses of as much as 37 percent. The swap held this week, for the so-called “trigger bonds,” also known as A2M2, was a deal more aligned with market prices. Those who held out from participating are betting on getting paid the full amount Friday.

A cash payout would likely require a peso transfer from the central bank, threatening to fuel inflation that’s running above 50 percent annually. Of the 1.8 trillion pesos due this year, 1 trillion mature before the end of June.

“But the concern is that now, if they pay, the message to investors is very bad, because it will mean a punishment to those who entered the swap,” said Emiliano Merenda, director of sales and trading at Mills Capital Markets.

Following the announcement of the swap, the government criticized investors seeking short-term profits and harming its efforts to rebuild debt sustainability.

“If they persist in significant amounts, they will consequently be addressed using all available legal tools,” the Ministry said in a statement.

There are some hints that the government may pay. Argentina’s pension fund FGS, supervised by social security agency Anses, is said to have bought some of the bonds in secondary markets March 5, according to people with knowledge of the matter.

While dollar debt talks continue, the country will continue to face this dilemma with every peso maturity. The next large one is June 21, when a bond with payouts linked to monetary policy matures.

“The government is caught between a common-sense decision to pay off the balance and a political imperative to show the bond market who’s boss,” Portfolio Personal Inversiones analysts wrote in a report. The government “should take the path of least resistance this time around because it buys the Treasury a ton of good will with the market, and it also clears a runway for even more normalisation of the local bond market trading.”

by Ignacio Olivera Doll and Scott Squires, Bloomberg

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