Climbing the Debt wall – Argentina’s restructuring deal

After tense negotiations, creditors have green-lighted the Argente government’s deal with bondholders to restructure $65 billion worth of foreign debt.

At the end of 2019, Argentina’s debt stood at a soaring $323 billion (Jourdan, 2020) and has been struggling to pay it back for almost 20 years. In early August, the government struck a deal with BlackRock Inc. (who represent 3 creditor groups to which the government owes more than half its foreign debt) to restructure some $65 billion in bonds.

A bond is a type of debt security or financial instrument that allows governments, companies and other organisations to raise cash by borrowing money from investors who buy them. Bondholders are creditors to whom the institution owes money for purchasing their bonds.

This will see the old bonds being replaced with new ones to be repaid at 55 cents on the dollar, with Economy Minister Martín Guzmán announcing it would generate $38 billion of debt relief (Heath and Garrison 2020).

It also means that the government will have a prolonged period of time to pay it back and interest rates that creditors are entitled to will drop significantly. While bondholders will be less than pleased with a significant haircut on their original investment, they can find relief knowing that sparing the Argentine government some breathing room will give them a better chance at organizing the repayment of their extraordinary debt.

In its history, the government has defaulted nine times on its debt obligations, and twice in the last 2 decades (Bartensien, 2020). As the 2nd largest economy in South America, the heavily indebted state is keen to avoid the reputational damage that stirs from not paying creditors on time. It’s standing on the international credit borrowing market was damaged after defaulting almost $100 billion in 2001, and the IMF put down strict conditions on its biggest loan in history to the government – $57 billion – to prevent the government from defaulting again (Goñi, 2018).

Naturally, paying back the IMF will be the next biggest challenge for Buenos Aires as the new government under Alberto Fernández has halted the loan and is now looking to repay the $44 billion already disbursed.

The pandemic has worsened the country’s recession that started in 2018. With the economy expected to contract between 10 – 12% and inflation at around 40%, this has significantly raised prices for everyday items as well reduced government spending.

Perhaps most tragic of all is the devastating effect on the country’s youth. UNICEF’s Argentine branch estimated that almost 63% of children will fall beneath the poverty line by the end of 2020 (Buenos Aires Times). Already, more than half of children live in impoverishment, and the tens of thousands of jobs lost has meant more and more households have less income supporting them. There is no doubt that these factors came into play during the negotiations, as the foreign bondholders would have undoubtedly looked cruel and inhumane demanding extortionate amounts of money from a government that can barely cope with growing poverty, rising inflation rates, and a currency with little confidence.

The deal struck with BlackRock will bring some much needed assurance to Argentina as it begins to tackle its massive wall of debt. One should certainly keep an eye on its new target – the IMF – as the government aims to restructure the repayment of those that loan as well.

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