Argentina: A Deal For The Holdouts… At Last
It’s been a long time coming. After several false dawns, Argentina’s authorities have finally announced their intention to reopen the 2005 offer for holdouts who chose not to participate in the country’s bond restructuring deal. At this stage, it is difficult to distinguish fact from fiction, but according to local media, three banks (thought to be Citigroup, Barclays and Deutsche Bank) have proposed a plan that would ask holdouts to put up fresh funds to buy new bonds in addition to swapping defaulted securities for new paper. Should an agreement be reached, Argentina would technically regain access to international capital markets beyond Venezuela – and not before long.
The restructuring proposal is undoubtedly a welcome development, and another sign of more market-friendly policies in Buenos Aires, following a number of debt buybacks since mid-August, as well as the shock decision in early September to repay some US$6.7bn of Paris Club debt. Nevertheless, it is too early to say whether the Fernández administration will regain the trust of foreign financiers. Even if the government manages to convince the majority of defaulted bondholders to play ball (not a given, in my view), the process could be a legal and administrative nightmare.
Moreover, the government has talked up policy changes and reform in the past, but has ultimately stuck to its ‘expansion at all costs’ policy mix. President Fernández needs to exhibit a decidedly less interventionist approach to economic policy if she wants to reinforce her debt management credentials. A good start would be sorting out the inflation reporting problem. Actual consumer price data remains way off the mark – probably double the reported 9.0% y-o-y in August – and an acknowledgement of past discrepancies could help mend relations.
While quietly optimistic, I would prefer to remain on the sidelines for now. Globally speaking, risk appetite remains subdued, meaning that any significant moves on the back of these headlines are unlikely. In the credit market, spreads should continue to come down from current distressed levels. Currently at 855bps, the spread on the 5-Year Credit Default Swap (CDS) could continue to narrow towards trendline resistance at 700bps, market conditions permitting. However, I remain sceptical whether significant spread compression over the medium term is on the cards.