Kicillof backs down from debt stand-off; Guzmán takes the lead

Buenos Aires Province Governor A xel K icillof blinked first on the eve of a prospective default, announcing last Tuesday that both capital and interest on the BP21 bond totalling some US$ 277 million would be paid in full and thus averting a major headache for debt negotiations at national level. As a result, country risk fell six percent on Tuesday to close well below 2,000 points at 1,891, where it remained for the rest of the week.

Amid shifting deadlines (fromthe original January 26 to last Wednesday) Kicillof’s resistance had been gradually whittled away from when he first announced on January 14 that he would be seeking creditor assent to defer all payments on the “unpayable debt” until May Day. Over the next three weeks Kicillof first offered to pay all interest up front as a sweetener before tacking on 30 percent of capital just two days before last Wednesday’s deadline.

But any rescheduling needed the assent of three-quarters of creditors and Kicillof only had a quarter on board by January 27 (according to Economy Minister Martín Guzmán) and at best half as the deadline approached last week, even with the sweeteners.

Kicillof said that the money to repay BP21 would be raised by placing new provincial bonds in pesos without assistance from the national government, adding that he would be seeking the renegotiation of the totality of provincial dollar debt. The Frente de Todos governor implied that he had wanted to ensure the payment of January salaries before seeking the funds to pay the debt.

According to Kicillof, provincial debt totals US$ 11.9 billion with 2.7 billion or some 220 billion pesos falling due this year.

Vice-President Cristina Fernández de Kirchner’s favourite economist shared the blame for this unwelcome outcome between what he called the blocking tactics of an unnamed fund holding over 25 percent of the bond and the fiscal irresponsibility of the preceding María EugeniaVidal administration, which had increased provincial debt fivefold during her four-year term according to his figures. Yet, the largest holder of BP21 are two funds run by Boston-based Fidelity sitting on 16.4 percent, while it was issued not by Vidal but by Peronist governor Daniel Scioli in 2011.

Despite the risk posed to national debt negotiations by Kicillof’s default brinkmanship, the governor was never reproached by the national government – from Europe President Alberto Fernández said that he was acting “correctly.”

Wednesday’s deadline was thus surmounted without default but a new D-day looms soon enough, this time at national level for a much larger sum – the AF20 bond to the tune of US$ 1.637 billion, which falls due this coming Thursday (February 13). With one week to go only around 10 percent of creditors were showing interest in the bond swap offered by the government consisting of four peso-based instruments even if one of them (Treasury bonds) is index-linked to inflation. This bond swap would imply a haircut of between 20 and 40 percent depending on the mix of instruments.