The "chicken race" continues

ARGENTINA - Report 14 May 2020 by Esteban Fernández Medrano

As might have been expected, in this “chicken race” between the government and bondholders to restructure Argentina’s debt, in which both are trying to obtain the best possible deal, the first official proposal did not reach the needed majorities to reach an agreement.

The fact that it was a unilateral proposal from the government made it clear that the negotiation process was far from a deal, and that an agreement would still require tough goodwill compromises on both sides. And even then, a possible solution is unlikely to happen until the very last days, i.e., shortly before the local sovereign formally enters into default on May 22.

In line with this, last Friday’s initial deadline passed, and the government limited itself to announcing that it was extending the negotiation period to May 22. At first, officials stated that they would not change the offer. But then, they softened their stance, stating that they would not change it before receiving a counter-proposal from bondholders, i.e., the government “naturally” kept the negotiations open, trying to reach an agreement with at least 75% of bondholders of the bonds they are seeking to restructure. In plain English, the government passed the ball to the bondholders, waiting for them to make a comprehensive counter-proposition to act as a negotiation reference.

Although market uncertainty remains very high, and a useful thermometer of this nervousness is the skyrocketing spread between the official and unofficial FX rates, local agents still expect that the government will receive some counter proposal towards the end of this week. Yet it will have to be seen if such a hypothetical counter-proposal will help to close the negotiation gap or just make it clear that chances for an agreement are very far away. No announcement at the end of this week or the first days of next week would suggest that the latter is happening.

In the case that no mutually acceptable agreement is reached before the 30-day grace period passes, after failing to pay the coupons of the April 22 bonds, the market speculates that the last "ace" that the government might try to use is to postpone the legal consequences of a default. That is to ask US and UK courts to issue a judicial stay order. This request would be made in light of the extraordinarily adverse global circumstances in which these debt negotiations are being held, due to the coronavirus pandemic.

No doubt, the coronavirus pandemic is generating an unprecedented global crisis that makes it very difficult to anticipate economic and particularly fiscal performance. Despite Argentina’s bad track record in the US courts, the government might reasonably argue that it needs more time to fully understand the scope of the global economic crisis before being able to improve the offer, in particular, if the government wants to avoid generating concerns on Argentina’s future debt dynamics and therefore miss the fundamental aim of the debt restructuring, i.e., having a sustainable debt path with falling interest rates (i.e., rising post-default bond prices).

Yet such a last resort option would still be costly, not only for the government, because local markets might maintain the pressure on the peso in part because the BCRA sterilization policy is again put under doubt, and the markets might eventually demand higher domestic interest rate placements, but also for bondholders. By introducing a new player (the courts) into the negotiations, the government and bondholders, as both sides, lose control over the process.

In this report, we review some of the main details of the initial proposal, trying to sense where the main changes might be introduced.

Now read on...

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