[London, 29th Reuters]-With the Argentine government's plan to extend its debt repayment deadline, investors are wondering if the country will fall into full-fledged default.
Argentine assets have fallen sharply since the opposition candidate Fernandez, who was leaning toward populism in the October presidential election held this month, took the lead over the incumbent President Macri. The central bank was forced to defend its currency peso by spending foreign currency reserves.
The government will not be able to refinance much of the domestic short-term debt, and Finance Minister Lakunsa will present a plan to extend the repayment date for bonds based on domestic laws held by institutional investors on the 28th, as well as foreign debt and the International Monetary Fund (IMF). He also expressed his intention to extend the repayment deadline.
This proposal needs to be approved by Congress. In addition, only the extension of the repayment deadline, the reduction of principal (haircut) is not included.
According to Terimar, a developing market investment company, the repayment extension plan covers short-term debt of $ 7 billion, long-term debt of $ 50 billion, and IMF financing of $ 44 billion.
Argentina has a history of defaulting in the past. After the most recent 2001 default, the country had suffered from a recession and economic crisis for many years, and finally came out of the crisis only in 15 years.
Investors have different views on whether defaults are inevitable, extended repayment dates will lead to the recovery of the Argentine economy, and how bondholders under international law will be hit.
Deutsche Bank's Hon Tao Jian said that if Argentina only faces a liquidity crisis, deferred repayment is helpful, but the problem seems to be due to solvency problems, so the plan doesn't seem to work.
“There ’s no doubt that Argentina ’s external debt will be the default. I do n’t know if this announcement is equivalent to a credit default swap (CDS) default event. If done, it will be the default and the CDS guarantee will be implemented. "
The CDS premium has risen more than 2000 basis points (bp) since the presidential qualification on the 11th, and it has become a level that takes into account that default will occur with a probability of around 50% within one year. Within five years, this probability rises to over 80%.
Meanwhile, the peso has fallen about 22% against the dollar, putting pressure on not only immediate debt repayment but also the sustainability of the country's overall debt.
In the calculation of Deutsche Bank, due to the currency depreciation, the debt of Argentina increased to about 325 billion dollars in gross, reaching 103.5% of the gross domestic product (GDP).
“Even if the debt repayment period is extended, the solvency problem cannot be solved without a haircut that reduces the total debt, especially for external debt.”
According to Deutsche Bank calculations, all dollar and euro denominated bonds are converted to 15-year burette bonds with a nominal interest rate of 6.5% and 5%, respectively, based on current market conditions. Based on the assumption of 12% and 10% respectively, the market currently incorporates a 30% haircut ratio.
Exit yield is a market estimate of the value of a sovereign bond after debt restructuring.
BNP Paribas expected this month that Argentine bond holders will be forced to cut hair by 40%. However, depending on the scenario, this ratio ranges from 38.6% to 62.7%.
JP Morgan's Diego Pereira points out that the Argentine government's strategy involves many risks. In a note for customers, even if the Ministry of Finance took a break by extending the repayment deadline, it predicted that FX reserves and “dollarization” could continue to put pressure on foreign currency reserves.
Pereira pointed out that the parliament may carry over the domestic bond repayment extension issue after the presidential election in October, making it difficult to understand the bondholder's reaction based on domestic law and the IMF's reaction to be cautious. did.
Jean Dane, head of research at Ashmore Group, said about Argentina: “It ’s one of the most ridiculously run on earth, one of the hardest to foresee and messed up countries. There is no other country. "
(Karin Strohecker, Tom Arnold)
