Beware of the vultures

Once again, with the International Monetary Fund and Wall Street at its doorstep, Argentina faces a sovereign debt crisis that will go down to the wire. After four years of disastrous economic leadership by Mauricio Macri’s “best team in the past 50 years,” it is down to President Alberto Fernández and his pan-Peronist coalition to find a way out of this mess, ultimately putting Argentina “back on its feet” and on a sustainable path toward growth. Behind the wheel is Martín Guzmán, the Economy Minister who until recently was an academic working at Columbia University alongside Nobel laureate Joseph Stiglitz, and whose career was built arguing against the imposition of punitive market conditions on sovereigns states on the verge of default. As the major battle lines are drawn, Fernández and Guzmán must convince banks and hedge funds to accept a substantial haircut on their holding of Argentine sovereign debt, and while they can count on the political support of Donald Trump and the IMF, the spectre of a return of the so-called “vulture funds” continues to cast a shadow over the future of the South American nation.

From a macro standpoint, there are three major types of private creditors Guzmán and his team will deal with. This, of course, assumes the IMF’s public support for Argentina’s economic plan, which hasn’t really been laid out beyond a showing of fiscal prudence through the Solidarity Law. The pickle, it seems is to convince enough bondholders to accept a tough deal that is expected to include three to four years of debt relief and a reduction in interest and coupon payments that could go anywhere from 10 percent to 50 percent of the present value of the securities being held by the private sector, including major players like Greylock, Fidelity, Blackrock, Pimco, and others. These bonds, governed by New York law, have collective action clauses that allow a substantial group of bondohol - ders to impose the renegotiated terms on the rest, which b y c o n t r a s t means that a relatively small group could also block the deal for everyone else.

Thus, Guzmán and his team need to first convince low-risk, institutional funds that caught themselves in the middle of this mess too late to get out in time. These are players with long horizons that bet on safe returns for pension funds and other conservative savers, and probably the easiest in terms of any negotiation. The second group includes real money investment funds that are constantly chasing returns, and which have found an attractive risk profile with Argentine sovereign debt. These players also have an interest in finding quick resolution in order to avoid write-downs, as many have major positions, yet they also understand it’s all a matter of price. Finally, when the price is low enough, distressed debt investors will come in, potentially acquiring a large enough stake to block the restructuring and push Argentina into default. Players such as Paul Singer’s Elliott Management, which is believed to be sitting this one out. One of Singer’s attorneys in the decade-long battle with Kirchnerite Argentina was Dennis Hranitzky. He’s currently leading a group of 20 funds or so including Monarch Alternative and HBK Capital that will seek favorable terms from Guzmán et. al. Hranitzky is said to have been personally present when the Argentine Navy’s flagship ARA Libertad frigate was held in Ghana in response to a court order triggered by Elliott back in 2012.

Throughout Wall Street, many were surprised at the position taken by the IMF, which concluded this week that Argentina’s debt has become “unsustainable.” The institution led by Kristalina Georgieva indicated that “the primary surplus that would be needed to reduce public debt and gross financing needs to levels consistent with manageable rollover risk and satisfactory potential growth is not economically nor politically feasible.” Finally, the IMF’s technocrats asked for a “definitive debt operation” with “a meaningful contribution from private creditors.” This was the IMF’s conclusion after a staff visit to Argentina, a week after Guzmán spoke before Congress and told the world they don’t expect a primary fiscal surplus before 2023. In other words, the IMF was acknowledging that the previous terms of the stand-by agreement, signed with the government of Mauricio Macri, under the careful supervision of Nicolás Dujovne, were absolutely fictitious, and that it is willing to give Argentina time to grow rather than focus on austerity. The statement was celebrated in the Casa Rosada, while Guzmán’s team is said to have been cautiously optimistic. Wall Street was infuriated, as neither Guzmán nor the IMF gave any quantitative arguments supporting their claims.

The government imposed a timetable on itself, expecting the negotiations to be concluded by the end of March. It is looking increasingly unlikely, but there appears to be moderate optimism among some in the City of Buenos Aires that things could be quickly resolved, maybe a month after the original deadline. Conversations, of course, are ongoing, and major creditors have banded together to talk with the Argentine government. None of the major players want a default, but it isn’t clear whether Alberto’s team is truly conscious of what it would really mean for Argentina if it happens. Some are looking to call Guzmán bluff, noting things aren’t as bad as in other major renegotiations, including Greece where private creditors took a haircut that exceeded 50 percent. Others argue Argentina has no choice but to impose stringent conditions. The duel is already underway.

The rest of the economic plan will have to wait. Fernández has put in place emergency measures aimed at containing inflation, limiting excessive fiscal expenditure, and reactivating the economy. They are all short-term measures and rely on sustaining a positive trade balance, along with tough currency controls and a lot of fine-tuning to make sure things don’t get out of hand. The risk that they will is high. Yet, the boost of confidence that a successful, and quick, renegotiation of the debt would spark is the necessary, but not sufficient, condition for a sustainable recovery.