Argentina, between a strong recession and an almost inevitable DEFAULT

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International banks believe that local GDP will fall more than 3% and will be among the most affected. Country risk rose 11% and bonds are worth 25% of their price

The start of the financial week, without operations for two days in Buenos Aires due to the holiday, was once again extremely bleak.

Not only because the pandemic of the coronavirus It continues to spread to the world in an accelerated way, but because the responses of the central countries (with their central banks giving liquidity so that the chain of payments is not cut and the Treasury injecting money) are not giving results to alleviate the crisis.

Now the world is going into a general recession. While some thought that there would be some rebound in the second semester, now they all point to a stop that will last this year.

The Institute of International Finance (IIF), a think tank that encompasses all the main banks and investment funds in the world, calculates that the world economy will fall 1.5% this 2020.

In that forecast, known this Monday, they say that the Argentina It will be one of the most affected countries. They believe that the GDP will fall 3.1% this year, the biggest drop in the countries of Latin America and greater than several developed (United States, by case). “Argentina has been suffering a drop in GDP for two years and the COVID-19 It will exacerbate things in 2020, “says the IIF.

So it is not surprising that the punishment of Argentine assets is amplified wheel by wheel. The risk country Argentina, which was already at levels that marked financial ostracism, rose 11.2% on Monday to 4,519 basis points. Up 155% in the year and 100% so far in the fateful month of March.

It is at the levels of the beginning of 2002, when the country had declared the debt default months ago, but still far from the 7,000 points of August of that year.

Argentine bond parities are around 25%. This means that they are at default prices and only tempting for Vulture funds. It can be worse: the titles of the Lebanon (who recently defaulted on their bonds) are at 14%.

Because of this, debt restructuring is expected to be seriously at risk. Martín GuzmánEither way, it already slipped last Friday that the proposal will be disadvantageous to creditors.

The global crisis adds arguments and removes responsibilities from the Government to end in a default total debt. Guzmán cannot offer investors much given the fragility of the local economy and the pandemic of the coronavirus was the final thrust.

The numbers that the official showed on Friday on fiscal “projections” and guidelines for restructuring go that way: that there is a default and then we see how to put things back together with investors.

The market knows this: insurance to cover a default (known as CDS) shows an implicit probability of 100%. This means that those with bonds pay a very high premium to ensure that their titles will be paid if the country declares the default.

The main argument of Guzmán to avoid a unilateral “pagadiós”, that the country has access to markets again, succumbed to the global crisis. Argentina has no chance of having financing in the medium term.

Complex decision in the short term

An interesting report by Consultatio, Eduardo Costantini’s company, entitled “Default: the remedy can be worse than the disease”, said the following:

– “The magnitude of the impact of COVID-19 in the local economy it understandably altered all the priorities on the government’s agenda. The question we ask ourselves is whether it also changed course. “

– “The agenda so far consisted of ordering the financial front (restructuring the debt) and then being able to face the macroeconomic agenda. With the declaration of the health emergency and consequent economic blackout, this agenda needs a revalidation.”

– “Minister Guzmán’s conference on Friday afternoon, where he explained the guidelines for debt sustainability, would seem to be a sign that the agenda is being maintained.”

– “However, if the deterioration of the external context continues to deepen, the government’s political and internal pressures to abandon the path of restructuring could intensify.

– “Against this background, we ask ourselves whether it is really worth continuing on the path of restructuring in such a complex world. Our position is that default brings very marginal short-term benefits, does not solve any of the central problems that Argentina has today and adds others that are not on the agenda today

For now, the projections are still negative. Of course, this “Black Swan” hits all emerging countries, but Argentina was already coming from a long period of pigtails (since the PASO in August 2019).

According to Delphos Investment, the EMBI Global (that is, the average level of country risk taking all emerging countries) received the year with a level of 280 points and as the cases of coronavirus increased, destabilizing the different world economies and forcing them to take various preventive measures, this level was increased to exceed 500 points.


If the region is zoomed in, says the consultant, the Chilean country risk with the advance of cases in the world exceeded the 154 points it obtained during the period of civil conflicts, when the country was in darkness.

“Brazil faced a spread of 400 points in recent days, with multiple consequences ranging from a sharp cut in economic growth by the REM to the high exchange rate that reached 5.1 reais to the dollar,” he says.

In the Argentine case, adds Delphos, “the weight of not having fulfilled the duties indicating the way forward after having presented the economic goals for the next years, added to the scarcity of external sources of financing, are variables that play against. Showever, the global risk of further spread of the virus now appears to be the primary variable.

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