Argentina default plan burns traders who trusted local debt

Bloomberg

In Argentine trading circles, a consensus had emerged of late that the government was likely to treat some local creditors the same way it would treat those who own its foreign bonds when widely anticipated restructuring talks finally got underway.
In fact, dollar-denominated bonds issued in the local market were trading just a few weeks ago at almost the exact same price as dollar bonds issued overseas — 28 cents on the dollar, give or take. That consensus was blown up when the government unveiled plans to stop payments on local dollar debt. Now, overseas notes trade
at about a 6-cent premium to
domestic securities.
The divergence serves as a harsh reminder of the added perils of investing in debt subject to local law instead of international law, something that seemed to have been largely overlooked as investors waited to hear the government’s restructuring proposal. President Alberto Fernandez says the country simply doesn’t have the money to keep paying its debt amid a harsh recession.
In a decree late Sunday, the government said it will suspend all payments on foreign-currency securities issued in the domestic market for the rest of the year as it prioritizes shoring up the economy and suppressing the spread of coronavirus.
By freeing up some $8.5 billion that would have gone to local payments this year, the move could actually be a boon for holders of foreign-law debt as they continue restructuring talks over $69 billion of bonds.
The decree in the Official Gazette said payments on local-law dollar debt may resume earlier if the Economy Ministry determines that it’s warranted given progress in creating a
sustainable plan.
Either way, investors will have little recourse in local courts that are widely understood to be friendly toward the administration. Of course most bond buyers knew of this very risk when they purchased the securities, which were issued when Argentina was still embroiled in a nasty feud with creditors who got burned in a 2001 default that left the country locked out of international debt markets.
“I never believed in this equal treatment business, as the government has so much more leverage on Argentine-law than on its New York-law debt,” said Edwin Gutierrez, the head of emerging markets sovereign debt at Aberdeen Asset Management in London.
Argentina has already been unilaterally delaying payments on some peso-denominated debt, even as it kept current on overseas obligations and embarked on restructuring talks over its overseas notes. Fitch downgraded Argentina’s long-term foreign currency debt
rating to “restricted default” from “CC.”
President Alberto Fernandez said in an interview published Sunday that the coronavirus pandemic had pushed debt talks to the back burner and that the country would prioritize the health emergency. Argentina has been on lockdown to try to stop the spread of the virus for weeks; so far there have been 1,554 confirmed cases with 46 deaths.
Even before the health crisis, Argentina was mired in recession with sky-high inflation and insufficient central bank reserves. Along with Ecuador and Zambia, it’s the country with the highest sovereign risk of non-payment in the world.
Argentina’s economy will probably contract about 6.4% this year, but in a worst-case scenario the drop could be as big as 20%, according to a TPCG report.
Most of Argentina’s domestic, dollar-denominated bonds count large foreign firms as their biggest holders, with BlackRock Inc. among the top investors. That had prompted speculation that the notes dominated by overseas players would be treated well in a restructuring because the government would want to maintain friendly relations with companies they will need to invest in the country.
But those assumptions now seem mistaken. Argentina took the decision just one month before it was due to make a key $1.4 billion payment on local bonds due in 2024.
The debt decree listed several public securities that are exempt from the measure, including non-transferable notes held by the central bank and certain dollar-denominated notes issued by the Treasury, such as those owned by the pension-fund administered by Anses.
”Analysts can say many things about what was expected and what was not,” said Alejo Costa, chief Argentina Strategist for BTG Pactual in Buenos Aires. “But at the end of the day money speaks, and market prices reveal info better than anything. This was partially priced in, but not fully.”