Argentina Finds Itself in Troubled Waters
Argentina lowered their central bank rate from 40% down to 38%, which is the eighth cut since mid-December. The new Peronist government pledged to rekindle growth that had stalled the country’s economy. Argentina had high levels of debt before COVID-19 began and was already financially stressed. Fears of defaulting on loans and bonds as well as slowed inflation fuelled the decision to lower interest rates. The average coupon rate on Argentinian debt is 7%, which is marginally higher than the 0% coupon rate that Germany pays on their 30-year government bonds. The added economic strain of the coronavirus on the Argentinian economy left the government with no choice but to lower interest rates.
As Argentina falls on hard times, the country seek to restructure US$65 billion worth of “unsustainable” international bonds. Economists state that Argentina’s first priority is to protect its people from the health and economic consequences of the coronavirus. This is as opposed to repaying creditors who already knew they were taking a big risk by purchasing high-yielding Argentinian bonds. The onus is consequently on the creditor to take a “constructive approach” towards the restructuring proposal on Argentina’s reduction in government bond coupon rates.
Along with the cut to coupon rates, Argentina proposes a three-year repayment hiatus and an extension of maturities by a further decade. Bond holders are granted until the end of 8th May to accept this proposal. This restructuring process is not alone and is part of a broader plan which includes the International Monetary Fund and Paris Club of country-to-country lenders. More broadly speaking, Argentina was already considered to be in a recession before the country commenced coronavirus-induced lockdowns on 20th March. The proposals put forward to bond holders is said by economists to be a responsible offer and reflected the country’s ability to pay. Presently, the country has until 22nd May to source a deal otherwise it could risk defaulting and subsequently fork out approximately US$500 million on three separate bonds.
Reaching an agreement by 8th May is proving to be unlikely as the country has been rejected by three major creditor groups. The creditors were aware that the previous bonds they had acquired were risky and that the interest rate reflected this. A capital advisor noted that considering Argentina has a poor credit history, their rates are remarkably low given their circumstances. Defaulting on rates this month would mark the ninth consecutive month of doing so. This, in turn, places continued pressure on the government and is likely to force the country into a deeper recession.
By Caroline Wong
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