impending definition for bonds under New York law

The world capital markets will open on Monday with the name of Argentina again associated with the word “default”. And the question that will be revealed in a matter of hours is whether the deferral of US $ 10 billion in payments for bonds under national legislation that will also have a correlation of default for the portion of the debt issued under New York law.

The decree issued by Minister Martín Guzmán fell on Sunday night as a cold water bucket for investment funds that have Argentine debt bonds in their portfolios. Until then, the thesis that appeared with greater probability was that the Argentine government attempted a “stand still” agreement.

In the jargon of the market, this implies a pause – by mutual agreement – in the negotiation and also in the payment, in view of the extraordinary situation that is experienced due to the coronavirus pandemic.

But the new unilateral move left the feeling of a change of strategy on the part of Argentina. Alberto Fernández himself, in journalistic statements this weekend, had hinted that there would be some turn in the matter, stating that the debt problem had dropped several steps in the ranking of national priorities.

And, in financial terms, the change in strategy was reflected in the fact that Guzmán, contradicting his promise not to make differential deals between different types of creditors, makes the announcement of the postponement of payments for investors under Argentine law.

Wall Street analysts who follow the issue closely commented that this implies a paradox: not paying part of the bondholders means that Guzmán will now have more resources to pay the other part of the debt. Consequently, that its negotiating position loses strength, because its main argument for proposing a strong capital drawdown – there was talk of up to 70% – would no longer have as much support.

In all his communications with Wall Street – and also in the document that the International Monetary Fund issued at his request – Guzmán had raised the inalienable principle that all offers should be economically sustainable. This IMF document already suggested the imminence of a default, recognizing that the country was not in a position to make payments until at least 2023.

As investors see it, now the postponement of part of the payment leaves Guzmán with two possibilities:

1 Breach also the bonds under foreign legislation, by way of an agreement that involves freezing negotiations until next year and seeking that the situation is not interpreted as default; or

2 Continue the negotiation of the debt reduction not reached by the decree on Sunday, in which case the investment funds could argue that they now have more resources to make a payment plan sustainable and, therefore, a takes away in the terms in which it had been speculating in the market.

The opinion of some analysts who see the situation from Wall Street is that it will be difficult to find another way than a postponement – that is, a technical default – also for the part of the debt not issued under local legislation.

Anyway, there was last night another possible interpretation that was commented among the experts: that this unilateral measure was forced by the fact that in May the schedule indicated an expiration and, Given the certainty that an agreement would not be reached before that date, it was better to force local reprofiling, in a kind of signal that negotiations will continue under foreign law.

There is also, of course, the possibility that this deferral was part of an agreement made with foreign funds as a way to guarantee that there is a willingness to agree to pay the debt under New York law. It is a speculation that circulated as soon as the decree was known, given that objectively it can be argued that Argentina now has greater financial strength to make its ability to pay credible.

For now, the price of Argentine securities at the opening of the markets will already give a guideline in the sense of whether the bondholders consider that the change in strategy should be considered a smooth and flat default or if there is still a chance of reaching a agreement once the economic emergency derived from the pandemic had passed.

Guzmán loses credibility

Meanwhile, the first reactions at the local level lead us to think that Minister Guzmán’s situation is rapidly weakening due to what is perceived as a loss of credibility.

At the moment, among analysts there is no doubt that the new situation qualifies, at least, as a technical default or selective default.

“On Tuesday Guzmán told journalists that bonds under local law were going to have the same treatment as bonds under foreign law … and today Sunday they announce the default of bonds under local law,” said analyst Juan Manuel Palacio.

In the same vein, the consultant Salvador Di Stefano, considered the announcement as “high treason of the government” and argued that Guzmán “clearly does not decide anything, it will be necessary to look at another minister or cabinet man, they are a horror”.

The economist Gabriel Caamano, of Estudio Ledesma, considered that the discursive turn “invalidates all of Guzmán’s lectures”.

Meanwhile, Diego Giacomini, chief economist at the consultancy Economics & Regions raised what he believes will follow as a consequence of this announcement: “1) Argentina worse macro performance among 200 countries in 2020, 2) We are going towards 3-digit inflation, 3 ) Collapse of historical GDP in 2020, 4) default that will also last in the next term. “

Not all visions are critical, however. For Miguel Kiguel, director of the consulting firm Econviews, it is an appropriate decision, “because as there are few dollars left, somehow they had to choose what to pay.”

From this point of view, the change in strategy could be interpreted as a way of signaling that the debt settlement will be sought first under foreign law and only later the local one. “As an important payment comes in May and they will not have fixed the part of foreign debt, so the most expected thing was to postpone, “observes Kiguel.

In the days prior to Guzmán’s announcement, the risk rating agencies had already taken note of the uncertainty about Argentina’s willingness to advance in the negotiations and had brought the debt note to a level of almost default.

For example, on Friday Moody’s had warned that investors could suffer losses of more than 65% in a restructuring.

“More importantly, the coronavirus pandemic, which the rating agency considers a social factor, will only exacerbate the already deep economic and budgetary challenges facing the government, which will ultimately increase financial stress and the level of losses that are likely bondholders incur, “Moody’s said in the statement.

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