Sovereign Analysis /

Argentina: Dreaming of Uruguay

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    10 October 2019
    Published byTellimer Research

    Leading opposition candidate Alberto Fernandez has suggested he will pursue a Uruguay-style debt restructuring if elected. This saw a five-year maturity extension with unchanged coupons and principal, resulting in fairly modest PV losses to investors. The idea has appeal; for Argentina bondholders, it might even be the second-best outcome, given the starting point and alternatives.

    We calculate similar treatment in Argentina could lead to recovery in PV terms of c60-70 (for a representative medium-term bond – 2028 maturity), depending on the assumed exit yield, compared with current prices in the low 40s (42 mid for the 5.875% 2028 US$ bond). Even adding a Ukraine-style 20% nominal reduction (with maturity extension and unchanged coupons), PV is still c48-57. 

    But a Uruguay-style solution may not be viable. First, factors that made Uruguay a success may not be present for Argentina; eg political commitment to a necessary stronger fiscal adjustment may be lacking. Uruguay had strong buy-in. Without strong policy commitment there is no guarantee that the fiscal space provided by maturity extension will improve debt service capacity, which would merely lead to the need for another restructuring at some later date (in fact, with a strong policy commitment, there might not be a need for any kind of restructuring at all). Second, the IMF may think differently and want to see more burden sharing. Ukraine, with a small (20%) nominal reduction, may be a model, although, as we show, that still offers upside from current prices. 

    That is not to say some form of reprofiling or restructuring is not feasible – and raising the Uruguay model has set out the stall to make a restructuring inevitable – but, if necessary, it should follow good-faith discussions with creditors and IIF/G20 best practice, the IMF should be involved and, given the domestic maturity profile, Argentina may need a domestic exchange too (Uruguay or Jamaica (2013) may also be a model). But, in the first instance, it will depend on the next president’s policy objectives, and the IMF’s assessment of debt sustainability and financing requirements. To that end, obtaining a new IMF programme (which implies a commitment to pursuing sound policies) will be an essential part of restoring investor confidence and setting the ground for creditor talks to begin. But this is where the intrinsic conflict between what Fernandez wants to do, and can do, given his own ideology and political constraints, and what the IMF needs/wants to do, will come into play. 

    It is not clear how long it will take either. We could be positively surprised, and Fernandez and his team have made encouraging steps (although other comments sound incoherent and inconsistent). They could be ready to move on day one. But, despite saying he wants a programme, it is not obvious he will agree to what the IMF will want to see (on private sector involvement – PSI – and policies), or be able to implement it, or how long it will take to reach an accord with the Fund. However, the cost of not doing so would be equally high. 

    We upgrade our recommendation on US$ bonds to Hold from Sell (although arguably lower cash price bonds are preferred). We see upside potential from current prices in “restructuring-light” scenarios, and more generally from an illiquidity versus insolvency diagnosis, but the outlook is uncertain. Further downside is possible if there are policy missteps or if Fernandez’s stance towards the IMF or creditors hardens, but downside may be limited at current prices (few performing sovereign bonds, let alone defaulted ones, have traded this low). However, upside – and its timing – is also uncertain, and inter alia, is dependent on Fernandez’s policy objectives, and the IMF. We think the IMF will seek more from PSI and that it could take longer to secure an IMF programme.