It does not, and the global inflationary wave is already brewing a new debt crisis in the South American country. This time, the problem is in the local bond market, where creditors are not keen to roll over maturing government bonds. With spending still high and pressure from the IMF for the government of Alberto Fernández to stop financing its high deficit through the central bank’s banknote printing machine, the feeling in Buenos Aires is growing that the government is running out of financing options and that a restructuring of local bonds is already almost inevitable.
Part of the problem lies in the fact that most of the bonds are tied to inflation, the only way that investors accept in order not to lose value in the face of the gigantic price increases that the country is experiencing permanently. Thus, the worldwide explosion of inflation, instead of providing debt relief, as many countries whose interest rates are growing well below their income have noted, in Argentina only increases the bill. And with the CPI exceeding 60% per year, one of the highest levels on the planet, the required return on its bonds is reaching terrifying levels.
The public debt auction scheduled for Tuesday will allow us to appreciate how serious the situation is. The Government wants to sell about 250,000 million pesos (about 2,000 million dollars) in bills tied to inflation. Demand has waned in recent auctions, and bond yields have soared above 12% in recent secondary market trades, which, added to inflation, means interest is over 70%.
At the same time, the demand for dollars is increasing, sinking the peso in the parallel exchange market -the official one is strictly regulated by the Government- to historical lows almost daily, in a clear sign that investors are redeeming their bonds and taking money abroad.
All of this is drawing the attention of Argentina’s foreign bondholders. The government doesn’t have to make major payments on those bonds for years, but investors are still getting nervous, driving the price of the benchmark securities down to just 23% of their face value. At that price, the return is 21%, making the country one of nearly two dozen emerging market nations that has sunk into distress territory, a level that indicates investors are beginning to prepare. for the possibility of a default. For Argentine creditors, this situation is familiar. The country has defaulted three times this century, most recently in a 2020 restructuring deal that left investors with just over 50% of the invested capital.
“The path for Argentina to accumulate enough international reserves to make principal payments on its foreign debt in the coming years looks increasingly narrow,” said Jared Lou, a portfolio manager at William Blair Investment Management in New York. “Last time’s restructuring was flawed in that it offered debt relief and low coupons without requiring any reform, and this is where it has gotten us.”
Clockmaking bomb
The Government is taking steps to defuse the time bomb of local debt. On June 22, the economy ministry swapped more than half of its 600 billion pesos in local bonds maturing at the end of the month, in a swap that sharply eased pressure on Tuesday’s key refinancing. But although the government swapped more debt than expected, most of the participation came from public institutions, indicating that private investors are less enthusiastic.
Economy Minister Martín Guzmán has repeatedly said that the government will never stop paying its local debt. But it could be difficult given the targets set in the $44 billion credit program that . The program limits Argentina’s monetary issue to 1% of GDP this year, cutting off a key source of central bank financing to service local debt.
Amid all the recent market volatility, efforts to strengthen the peso debt market “remain critical, along with the firm implementation of fiscal targets,” IMF Managing Director Kristalina Georgieva said last week.
Ramiro Blázquez: “The increasingly shorter maturities could generate a debt crisis before the elections”
Argentina has been slow to raise interest rates so as not to cool down too much an economy that is still struggling to emerge from the stagnation caused by the pandemic. Growth slowed in the first three months of this year compared to the previous quarter, affected by the contraction of the agricultural sector and the fall in exports. The central bank raised rates by three percentage points to 52% earlier this month to encourage investors to buy local stocks.
However, it might not be enough to avoid a debt crisis before the October 2023 presidential election, as investors demand assets with increasingly shorter maturities, according to Ramiro Blázquez, chief strategist at brokerage BancTrust in Buenos Aires. . “The increasingly shorter maturities could generate a debt crisis before the elections,” said Blázquez. “To avoid that scenario, the government is likely to use a combination of pressure and modest rate increases to ensure decent reinvestment rates. But success is by no means guaranteed.”
Tuesday’s sale will consist primarily of discounted, inflation-linked Treasuries due later this year. Argentina is also selling dollar-linked bonds maturing in 2023 and 2024. “As long as prices are reasonable and the Treasury issues short terms as well, mostly what remains to be renewed will be renewed,” said Carolina Gialdi, chief of sales and trading of international markets of Max Capital in Buenos Aires. “But there is a preference for higher liquidity; they may not reach 100%.”
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