Two years after Argentina emerged from its latest default, a debt crisis in brewing once again.
This time, the immediate trouble is in the local bond market, where creditors have become reluctant to roll over maturing government bonds. With spending still high and the leftist government under pressure from the IMF to stop hitting up the Central Bank for cheap loans to cover its budget deficit, there’s a growing sense in Buenos Aires that officials are running out of financing options and that a local bond restructuring is becoming all but inevitable.
Part of the problem is rooted in the fact that the value of the vast bulk of the bonds is linked to inflation – the lone security that crisis-scarred investors have found appealing. So the explosion in inflation, rather than providing a big dose of debt relief as it has for governments across the globe this year, is actually further straining fiscal coffers. Consumer prices are soaring at an annual pace of more than 60 percent here this year, the fastest rate this century and one of the highest in the world.
A government bond auction scheduled for Tuesday will provide a look at just how acute the crunch has become. The government is looking to sell some 250 billion pesos (US$2 billion) of inflation-linked notes and other securities. Demand has sagged at recent auctions, and yields on the notes have soared above 12 percent in secondary-market trading, providing an all-in rate of more than 70 percent at current inflation rates.
At the same time, demand for dollars is surging, sinking the parallel peso to record lows almost daily, in a clear sign that investors are redeeming their bonds and whisking the cash offshore.
All of this is catching the attention of Argentina’s foreign bondholders, too. The government has no major payments due on those bonds for years, but still investors are getting anxious, pushing down the price on benchmark securities to just 23 cents on the dollar. At that price, they yield 21 percent, making the country one of almost two dozen emerging-market nations that has now sunk deep into distressed territory – a level that signals investors are starting to brace for the possibility of default. This is old hat by now for Argentine creditors. The country has defaulted on its foreign bonds three times this century, most recently in a 2020 restructuring deal that gave investors just over 50 cents on the dollar.
“The path forward for Argentina to accumulate enough international reserves to make the principal payments on its overseas debt in the coming years looks increasingly narrow,” said Jared Lou, a portfolio manager at William Blair Investment Management in New York. “The restructuring last time around was flawed, as it offered debt relief and low coupons without any reforms, and here is where we are today.”
The government is taking steps to defuse the local debt time bomb. On June 22, the Economy Ministry exchanged more than half of its 600 billion pesos (US$4.8 billion) in local obligations due at the end of the month in a swap that drastically reduced pressure for Tuesday’s key rollover.
But even though the government exchanged more than expected, most of the participation came from public institutions. It’s far from certain that private creditors will be as enthusiastic.
The sell off in local debt had been building as Argentines prepared to make June tax payments, and accelerated after comments from the opposition casting doubt on the debt’s sustainability, a senior Economy Ministry official said. Argentina is planning new measures in the coming days to stabilise the local market, according to the person, who asked not to be identified discussing the matter.
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Economy Minister Martín Guzmán has said repeatedly that the government will never stop paying its local debt.
But it could be difficult given the targets laid out in the nation’s US$44-billion loan programme with the International Monetary Fund. The programme limits Argentina’s monetary emission to one percent of gross domestic product this year, cutting off a key source of Central Bank financing to pay the local debt.
Amid all the recent market volatility, efforts to strengthen the peso debt market “remain critical, alongside steadfast implementation of fiscal targets,” IMF Managing Director Kristalina Georgieva said last week.
Argentina has been slow to hike interest rates in an economy still struggling to leave its pandemic-induced doldrums. Growth slowed in the first three months of this year from the previous quarter as the agriculture sector contracted and exports dropped. The Central Bank raised its key interest rate three percentage points to 52 percent earlier this month to prod investors into buying local securities.
Still, it may not be enough to avoid a debt crisis before presidential elections in October 2023 as investors demand increasingly shorter-dated paper, according to Ramiro Blazquez, the head of strategy for broker BancTrust & Co. in Buenos Aires.
“Shorter and shorter maturities could build into a debt crisis before the elections,” Blazquez said. “To avoid that scenario, the government will likely resort to a combination of arm-twisting and moderate rate hikes to ensure decent rollover rates. But success is by no means guaranteed.”
Tuesday’s sale will mostly consist of inflation-linked and discount Treasury notes due later this year. Argentina is also selling dollar-linked bonds maturing in 2023 and 2024.
“As long as the prices are reasonable and the Treasury issues short-dated instruments, most of what needs to be rolled over should be rolled over,” said Carolina Gialdi, head of international markets sales and trading at Max Capital in Buenos Aires. “But investors are showing a preference for higher liquidity, so they may not get to 100 percent.”
by Scott Squires, Bloomberg