It arises from the insurance that investors buy to cover a default from now and up to a period of 3 months. Pessimism grows
The brutal collapse of the world stock markets continues to punish Argentina. The critical situation puts Martín Guzmán in trouble. The economy minister has to launch in the next few days an offer to exchange almost US $ 69,000 million in bonds and avoid a massive default on the debt.
The task, which was not easy from the start, was aggravated by the international situation. Argentine stocks plummet in a context in which investors favor the safest assets in the world (clearly the opposite). And in that framework, Investors’ perception regarding how the Argentine saga will end is overwhelming: they calculate that there is a 70% probability that the country will default.
This arises from contracts that bondholders buy to hedge against eventual default. Known as Credit Default Swaps (CDS), these insurances are issued by banks and sold to their clients.
The contract that covers the saver from now and up to a period of three months (that is, until June) is trading at 15,888 basis points. It has a built in probability of default of 70%. That means the CDS buyer pays $ 158 for every $ 100 he seeks to safeguard.
The most demanded insurance, that is, the 5-year term, is quoted at almost 10,000 points and has an implicit probability of 100%. Translated: the market believes that from now until March 2025 the chances of falling into default are total.
This is a true reflection of the financial disaster caused by the coronavirus pandemic, further exacerbated by the lack of confidence in the country that put a very low “floor” on the price of Argentine assets. Thursday, amid a violent sell off in Wall street, the country risk – the indicator of JPMorgan– It rose 8% to a maximum of 3,210 points.
The parities of the bonds to be exchanged (or, at least, those selected by Guzmán), are already below 35% in some cases. This means that the securities are trading at 35% of their original value. Basically, at default prices or “junk bonds”.
Now in the market they expect that Guzmán formally present the proposal. The negotiation will be complicated because the most important funds such as BlackRock or Templeton, among many other local debt holders, are struggling with the global crisis of the markets.
They are having much more significant losses in their portfolios than with Argentine bonds (which do not even represent 1% of portfolios). There will be, they say, a “distraction” effect that could condemn Argentina’s restructuring.
The Economy Minister In a report to the Reuters agency, he said again that there will be an aggressive offer. “There is a need for substantial relief,” said the minister. “If someone thinks that we are going to kick the ball in a way that forces another restructuring later, they should think again, because we are not going to do that,” he added.
The big doubt
The question that is asked in the market is not only the hardness of the proposal, but – and finally – how the Argentina will do to pay later what you agree to pay. The reason is that the fall in the world economy that is predicted by the coronavirus pandemic is a novelty for the world, but not for Argentina.
The country has already been in recession for 2 years and this 2020 will also be in the red. No growth and no significant fiscal effort (Guzmán Vaguely promised balance from 2023 but he is in doubt) there are not too many incentives for bondholders to accept an offer.
“The Argentine case is aggravated by the international situation. But it was already very complicated previously. It was not easy to restructure two months ago either. Now everything will be more difficult,” admitted a local operator.
The collapse of Argentine bonds, in addition, will worsen the value that the market will assign to the package it offers Guzmán (surely more term, lower interest rates and some capital drawdown).
The country could have dreamed that investors will demand an offer return of around 8%. Now, with the brutal fall of the titles the yields jumped. And that makes creditors surely ask that the offer have a performance well above the digit. It is believed that it could want between 12% and 13%.
For now, the chances that the issue of debt end with an unwanted denouement by Alberto Fernándezread a default, they grow more and more.
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