Investors grapple with Argentine ‘riddle’ as fears of default return

IMF could ask for Argentina to restructure its debt before disbursing the next loan installment, sources say


August 14, 2019 | Ivan Castano
© 2019 Latin American Financial Publications, Inc.


Global investors are coming to terms with Argentina’s latest financial scare after President Mauricio Macri fared worse than expected in a primary vote and gave rise to fears of a return to more interventionist policies under his challenger, Alberto Fernández.


After Fernández and his running mate, former President Cristina Fernández de Kirchner, took a 15-point lead in an early vote on August 11, the yield on Argentina’s century bond jumped 500bp to 14% in the secondary market, up from 9% at the end of last week, and the rate on the country’s 2021 notes soared to 45%, widening the inverted yield curve.


Argentina has $10bn in international debt due before the elections on October 27 and another $6bn in May 2020, according to Capital Economics. The IMF is expected to disburse a $7.62bn loan on September 15, part of a $56.3bn aid package of which $42 to $43bn has already been fronted. Meanwhile, Argentina’s debt-to-GDP ratio is expected to reach 100% by year end after closing 2018 at 87%.


Edward Glossop, an economist at Capital Economics, said there is a “very slim chance” that the IMF will hand Argentina the next loan installment without asking the country to restructure its debt, a move that would put it into default at least in the view of ratings agencies.


“I see a 70% to 80% chance of default, which could play out in several ways,” depending on whether Macri or Fernández wins the election, Glossop told LatinFinance.


If the IMF turns its back on Argentina and does not make the loan installment next month, the government could pay off the $10bn in debt with $66bn in dollar reserves, Glossop said. But as ongoing political uncertainty takes a toll on the peso and Argentina’s sovereign bonds, the government might find it difficult to service the $6bn in notes due in May, Glossop said.


Whatever happens, bond buyers are beginning to think about their next moves.


“It’s hard to give a timeline on [a possible default],” said an investor in New York. “We have not heard from anyone yet, not the IMF nor the Fernández camp, about what they plan to do. People want to hear what is going to happen from the relevant players” before making decisions.


Fernández tried to calm the markets on Monday, telling local media that he plans to meet the nation’s debt obligations but adding that Macri has taken the country close to default. “If we didn’t have the IMF’s help, we would be in default,” he said.


Ray Zucaro, CIO at RVX Asset Management in Miami, said Macri will likely benefit from negotiating a solution with the IMF, even if a deal is done secretly to avoid turning off voters “who would not want to see more of the same thing,” referring to Macri’s IMF-sponsored austerity measures.


Investors, however, are unlikely to get new signals before the elections take place in late October, when the IMF could reveal how it plans to support the next administration, Zucaro said.


“I see Argentina as a big riddle that’s becoming harder and harder to solve,” he said. “We are going to have 75 crappy days” in the run-up to the elections.