Sustainable sustainability? Or risks to Plan B?
Reading the Ministry between linesThe “erratic” management of the pesos
Recalculating the potential offer
It’s not three, it’s two
Plan A or B?
Sustainable sustainability?Or risks to Plan B?
The overwhelming fiscal signal sent with the sending to Congress and record approval of the Social Solidarity and Productive Reactivation Law in December was trapped in delayed negotiation of the debt and jeopardizes the maneuvering room to stabilize the economy.
Moving the economy away from the default is a necessary condition to prevent a new shake. Without enough reserves to continue paying, and with 50% of the debt floating on the market under foreign law subject to international courts, preventing a default involves reaching an agreement with bondholders to get the majority set forth in the Collective Action Clauses (CACs) that will allow a successful swap. Clauses that include 75% of the total holdings in the case of the global bonds issued by Macri and 85% in the case of the 2005 debt swaps and their subsequent reopening in 2010.
With bonds parities at around 45%, there is a lot of room to reach an agreement that decompresses the financial front, but such margin starts to be diluted when what should be a negotiation begins to be imposed by the Government as an ex ante aggressive condition applauded by the political front. And which after the meeting with the IMF and with the Pope in Rome, the President’s discourse turned to “We have a Plan A and a Plan B, depending on what happens. We are going for Plan A, which is to reach an agreement on the debt and start to grow… But you know what? The dead do not pay debts”.
In his discourse at Congress, the Ministry of Economy went deep into the need that the debt be sustainable starting from an economic growth path of 2% annual, and a fiscal trajectory that on the best-case scenario could go from 0.44% in 2019 to an equilibrium in 2022 and 1% surplus in 2026. If the economy shows little growth and does not generate a surplus, sustainability will require a very aggressive cut on bond flows so that the debt/ GDP ratio remains constant. And this implies, depending on the discount rate applied by bondholders (the Exit Yield), a very high discount at present value.
Both messages predict a hard negotiation. Above all, when in addition to the negotiations, the IMF was included – which validates a significant haircut on the private debt -, while, simultaneously, the vice-president herself asks the agency from Cuba not only to reschedule the maturities concentrated in 2022 and 2023, but also a haircut.
Unless it is a similar pirouette to that of the Province of Buenos Aires in which the default threat finally did not materialize, it is not in line with the need to reach an agreement within the timeframe set in the strict schedule that in the imagination of the government finishes on March 31 with the “offer acceptance”. Just before the maturity of the interests on the Globales bonds in late April, the bonds issued by Macri to pay the vulture funds.
Of the non-transferable securities passed in the Solidarity and Productive Reactivation Law for US$4.571 BB to finance the transition during the negotiations, the incumbent administration has included US$3.082 BB so far, according to the Central Bank’s balance sheet. Of which, US$1.915 BB has been sued to face the payment of interests on the dollars under local and international law and the remaining balance to face debt with international agencies.
Going forward, if the government continues to hold an aggressive stance, which goes counter to the chance of a prompt renegotiation to stabilize the macroeconomy in the short term focusing on the “sustainability” of the debt, and with net reserves of around US$13.220 BB, the government looks unlikely to be able to remain outside markets much longer without decapitalizing the Central Bank.
On the one hand, maturities in dollars with the private sector amount to US$8.585 BB over the rest of the year, of which US$3.5 BB corresponds to maturities under foreign law, while it also faces principal and interests’ maturities for US$5.935 BB with International Agencies. The possibility of paying while the renegotiation goes one does not seem a viable scenario.
But, additionally, if the Government’s strategy was to play hard on the dollar debt under international law – to underpin the sustainability -, which would take a long time, not having cleared away peso debt maturities and having driven these bonds’ prices to double or even triple during January with the strong signal of the Central Bank and the Ministry of Economy that peso debt would be paid, was a serious mistake. Until June – without the intra-public sector holdings – the government faces maturities for $750 BB, which add up to the $113 BB from the compulsively reprofiled dual bond maturity last week to prevent its monetization from triggering the exchange gap. And Wednesday’s bid of LEBADs subscribed in only 64% without private participation shows that the market of pesos is cornered under the possibility of opting between a “voluntary” rollover (paying a rate below the market one rate over the indexer) or compulsive (without paying any fee), does not look like a compatible strategy in a normal economy. It is true that not having monetized the maturity stabilized the exchange gap in the short term. But it is not obvious that this is to be sustained if there is no solution to the debt in dollars, nor, let alone, if credit is to be boosted via a Central Bank that continues to manage the monetary policy as if the rest of the program were on track. The decline in the LELIQ rate last Thursday (from 48% to 44%) in the same week that bonds in pesos are reprofiled compulsively, and the Central Bank is forced to sell dollars while, simultaneously, starts to coordinate a crawling page above inflation and the interest rate, is counterintuitive to say the least.
The read that the political side cannot afford a default, and that keeping bond prices at levels that allow an agreement under the “agree otherwise I will take over” threat, starts to be covered in doubts generated by the movements in the past month. The government seems to be determined to be play hard. We will see if, simultaneously, it shows pragmatism in the definition of the offer that at bonds’ present values affords it a very tough discourse on the market along with a prompt agreement that moves us away from Plan B. Or if, on the contrary, new implementation mistakes end up throwing everything overboard.
An agreement is unlikely to be reached by March 31 as the strict schedule presented in the second half of January states and it will attempt to walk on a tightrope by reprofiling the debt by decree under local law. It is difficult to think that walking on a tightrope is sustainable after June.
