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Argentina rolls over billions of dollars in short-term debt

posted onMay 16, 2018

Argentina's central bank (BCRA) said it refinanced all of the $26 billion Lebac Peso-denominated bonds (“L”) that were set to mature this week, while auctioning off new debt worth another $200 million. BCRA said the interest rates ranged from 40% for the 36-day Lebac to 38% for the 154-day note.

The auction held on Tuesday was closely watched by investors as a failure to roll over the debt would have put more pressure on the peso, the worst performing emerging market currency this year. The Argentinian currency fell sharply on opening Monday and closed down 6.2%, trading at 25.52 against the dollar, having lost close to 33% so far this year. It gained ground on Tuesday, however, after the central bank sold reserves, closing 3.73 percent stronger at 24.10 per U.S. dollar.

“A dark day for the doomsayers. The ‘fateful Tuesday’ can be remembered as the inflection point of the financial turbulence of 2018,” Juan Llach, a local economist, wrote on Twitter criticising those who had predicted a rout on the currency as a result of the Lebac auction. 

Media reported that major foreign investment funds, including BlackRock and Franklin Templeton, participated heavily in the sale. 

"It was a successful auction," Marketwatch quoted Goldman Sachs economist Alberto Ramos as saying "But of course they had to commit to pay a very high distressed level of interest rates...this is not a sustainable path."  

Argentina Finance Minister

You can’t get a bigger sign of confidence from markets when you place a bond in pesos at a fixed-rate on one of the worst days in emerging markets this year,” Reuters quoted Finance Minister Luis Caputo (pictured) as saying on Tuesday. He added that Argentina will not issue any new international bonds for the rest of this year, and perhaps not in 2019 either.  

Argentina's government last week approached the IMF for financial support, estimated in US$ 30bn, according to local media, after the peso depreciated rapidly, prompting the central bank to sell billions of dollars in reserves and unexpectedly hike interest rates to 40 percent.

The IMF negotiations carry political risks for Argentina's market-friendly President Mauricio Macri. The last time Buenos Aires had a standby agreement with the U.S.-based organisation nearly 20 years ago, the country's unemployment rate rose to 20 percent, wages shrank and people withdrew large sums of pesos from their bank accounts to exchange them for U.S. dollars. 

The deal between the IMF and Argentina, which may impose fiscal belt-tightening conditions, is currently being negotiated in Washington. In a statement, the Fund said an informal IMF board meeting on Argentina has been scheduled for Friday. The Fund added that meeting was “part of our usual process of briefing the board on negotiations for high access IMF programs.” 

Macri said in a statement he had spoken to US president Donald Trump about the start of the IMF talks and that Trump supported Marci's discussions with the Fund. The United States has the most voting power of any IMF member country, with 16.5 percent of the votes. 

According to pollsters CEOP, Macri has only 37% support among Argentines, the lowest ranking of his presidency. “We have to take into account that the collective memory feeds on the bad memories associated with the dreaded IMF,” Mercopress quoted Roberto Bacman, CEOP's director as saying.

Meanwhile, official data from statistics agency Indec showed April consumer prices rose 2.7 percent, bringing 12-month inflation to 26 per cent, one of the highest rates in the world, when the government's target for the twelve months is 15%. The government earlier this month also announced it would reduce its target for its fiscal deficit this year to 2.7% of GDP from 3.2%  in another bid to calm markets.

Argentina, Latin America’s third largest economy, began its debt restructuring in January 2005.
This initial restructuring deal allowed it to resume payment on 76% of the US$82 billion in sovereign bonds that defaulted in 2001. A second debt restructuring deal was offered by the government in 2010, with improved terms. The new deal was accepted by 93% of bondholders (the ‘holdins’) while 7% (the ‘holdouts’) refused to agree to the new terms. Fast forward to 2014, having failed to come to an agreement with the holdouts, the country automatically defaulted on July 31 on $29 billion of debt. 

Following the 2014 default, the group of holdout bondholders and the Argentinian government refused to negotiate with each other. The situation shifted, however, due to the result of the Presidential election in October 2015 when Mauricio Macri won. Marci endeavoured to come to an agreement with the holdouts after his inauguration. In March 2016, a settlement was finally achieved. Argentina agreed to a $4.65 billion cash payment to its main holdout creditors while  a second settlement was reached in November of 2016 to pay a further $475 million to remaining holdout creditors.

Despite the fact the government has managed to roll over 25bn dollars in short term bonds taking pressure from the Argentine Peso, market analysts argue that the situation still remains potentially volatile. "In effect it yet has to see how the Peso loss of purchasing value will impact on prices and overall inflation, and economic activity...Likewise another question is what conditions the IMF could demand from Argentina for the stand-by loan, particularly referred to balancing the budget, which now stands at 7% of GDP" writes Mercopress.


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