Following three weeks of intense market pressure, Argentina announced its intention to extend the maturities of certain of its government debt (ie, maintain existing interest payments, no haircut to repayment of principal) – US$7bn of short-term debt, US$50bn long-term debt and US$44bn IMF debt. The surprising aspect of this announcement is the inclusion of the foreign debt, given the relatively low level of maturing foreign debt in the next 12 months.
From a low base of expectations (since the 11 August primary election, the debt market has moved to price in default, currency is down c25%, FX reserves down c15%, merely 10% of the most recently maturing short-term debt was rolled over, and equities are now valued at half their five-year median PB valuation), we see it as positive that this is being done sooner rather than later, with some coordination between the government and opposition. However, there is likely to be high execution risk associated with such an operation, and it does not necessarily alleviate policy uncertainty around what a future government could do.
Given the focus of the reprofiling operation, it should be easier to restructure the short-term (domestic) debt and the IMF debt. However, restructuring the long-term (foreign bonded) debt could be harder, given the existence of collective action clauses (CACs), creditor-coordination issues and the possible need to maintain PV neutrality.
To the extent it matters, the IMF response, following a scheduled trip to meet finance minister Hernán Lacunza, central bank head Guido Sandleris and opposition presidential candidate Alberto Fernandez, was supportive. The IMF “understands that the authorities have taken these important steps to address liquidity needs and safeguard reserves… will continue to stand with Argentina during these challenging times”. It remains to be seen how much damage has been done to the IMF’s credibility in other markets (not to mention that of former head, Christine Lagarde) given the unprecedented speed, size and heavy front-loading of the package initially approved for Argentina in 2018 and the recent positive progress report on July 2019.
We reiterate our Sell recommendation on Argentina's sovereign bonds (we downgraded from Hold here). We also reiterate our view published in the August equity monthly that, among the three big underperforming, very cheap markets in our universe, we prefer Pakistan (structural change afoot), then Argentina (a mess but also the lowest hurdle to attract back capital) and lastly Nigeria (low growth with no policy or structural change to address this).