Argentina’s New Look: Get ready for a haircut, bondholders
Argentina’s likely next president, Alberto Fernandez, has signaled his intention to “restructure” the country’s debt, meaning another selective default following the one already imposed by current president Maurico Macri in August. The terms currently proposed by Fernandez, who is widely expected to win the country’s next election slated to begin October 27, involve a “haircut” for bondholders of about 20%, according to Bloomberg.
- The selective default, also called “reprofiling,” would allow Argentina to reschedule repayments on its $100 billion of debt, including around $30 billion of bonds denominated in foreign currency. The reprofiling is apparently modeled on neighboring Uruguay’s 2003 default, when the country kept the debt’s principal the same but delayed repayments by up to five years, leaving bondholders with a 20% “haircut.”
- Argentina’s bondholders are skeptical however, with the trading price of Argentine bonds tumbling to just 40 cents on the dollar. That suggests Argentina’s bondholders expect much bigger losses than the 20% haircut imposed on Uruguay’s bondholders.
- There’s good reason for skepticism, per Bloomberg: Argentina’s foreign debt is about five times the size of Uruguay, while Uruguay had a budget surplus at the time of its reprofiling, compared to Argentina’s current deficits. Fernandez also plans to raise social spending, making the fiscal outlook even worse.
- Thus Fitch Ratings judges that the reprofiling “would require too much of a fiscal adjustment to be politically or economically viable,” adding, “It would weigh further on an economy entering its third year of recession, and political appetite for fiscal adjustment appears weak.”