Argentina’s puzzling buyback

It's not clear how the buyback can be used to support the currency—nor if this is a sensible use of scarce resources

• Economy Minister Massa “surprised” last week by announcing a buyback USD1 billion in external notes;

• The authorities see bonds trading at distressed levels as representing a “window of opportunity” for such a liability management exercise;

• But the buyback raises obvious concerns:

  • First, price action in the days prior suggests a leak of market sensitive information before the announcement—so it was not a “surprise” for everyone;

  • Second, with international reserves scarce, it might be better to build more of a liquidity buffer than retire such low-coupon, private external debt.

LAST WEEK Argentina’s Economy Minister, Sergio Massa, announced a buyback of USD1 billion in outstanding external dollar notes—the 2029 and 2030 maturities. The move is intended to improve the countries’ debt profile. And there are whispers that this plan will also involve selling these in the local market to sterilise ARS liquidity and reduce pressure on the currency—something that is hard to make sense of, as we discuss.

There was apparently no prior consultation with the Fund about this operation; Reuters’ reporting notes that “an IMF team is discussing the buyback proposal with the Argentine authorities, including to ensure its consistency with the objectives of the program, said a source...”

In other words, the announcement took the Fund by surprise as much as the market—and doesn't appear part of the program.

But might such an operation make sense?

Bonds under consideration

Let’s start by dealing with the suspicious circumstances surrounding the announcement.

The two bonds intended to be purchased in an amount up to USD1bn are the 2029 USD bond with a fixed coupon of 1% (outstanding face value of USD2.6bn) and the 2030 USD bond with a coupon that steps up from 0.125% in 2021 to 1.75% in 2030 (face value USD16.1bn).

These two bonds represent about 5% of the outstanding public debt of USD380bn.