Great post. Interestingly, many economists here in Argentina claim that the remunerated liabilities of the BCRA are not a problem. As I see it, the only way to stabilize the macroeconomy is to bailout this "borrower of first resort". Otherwise, same chronic inflation (or a purging hyperinflation) awaits
If the main problem is the flow rather than the stock of debt, how can an external creditor, i.e. a US/EUR-denominated bondholder, do his part? Coupons already have a shallow annual interest, between 0.5% and 4%. Added to this is that the first critical deadlines for capital repayment are 2030, 2035 and 2038. Bondholders have been asked to do their part many times in the last twenty years; the latest restructuring dates back to 2020.
First, IMF interest (SDR rate plus surcharge) requires interest payments in excess of USD20bn over the next decade. This needs relief.
Second, these coupons step up, so if they are refinanced near current interest rates they would be a greater burden still. Indeed, they could not be refinanced at the moment. So some reduction in the stock or further coupon relief is likely crucial.
No-one has done the maths properly that I'm aware of.
In the previous message, I was excessively brief about the annual interest Argentina pays foreign bondholders. Even though the coupons have a step-up structure, the state pays, would pay, low annual coupons for a country with a significantly higher risk profile than, for example, its neighbours Brazil, Peru and Uruguay.
An instant after reading the terms of the latest debt restructuring, every investor knew that there would be another one soon. But I don't think it was a question linked to coupons but instead to the country's ability to implement effective economic policies to solve structural problems.
Now, many investors and analysts think a new debt restructuring will occur at the end of 2024 or early 2025.
If the problem is the flow rather than the stock of debt, it means that a haircut would not be necessary. So what is left to ask of bondholders, after everything that has already been asked in the past? It seems to me that the only three things that remain are: (1) further cut coupons, (2) extend the bond maturities; 3) repay the capital in an amortized manner.
Finally, a personal consideration: it is right that every party involved in this mess does their part, but in many years as an investor I have never forced any company or sovereign state to borrow more than it was capable of. Although I am sorry for the social situation of the Argentine population, they must understand once and for all that the bad guys are not the international bondholders or the IMF, but themselves, as the politicians who have mismanaged them are their direct expression.
Personally, I don't feel responsible for the Argentine situation.
I have always had great respect, although I partially disagree with your final considerations on this occasion.
For example: Did you factor in the sustainability of the central bank when you made your investment? Did you think that public debt sustainability could treat each sector in isolation? Would be interesting to understand better.
From my perspective, immediately after the last restructuring it was obvious it would fail because there was no effort to fold in the quasi-fiscal implications of the central bank balance sheet. Of course, there will be no reforms. But the key reform, of the central bank, was never even contemplated by creditors during the debt negotiations.
Back to the case of external debt, if the coupon were kept or forced lower and maturities extended for (maybe) 50 years, then that might be enough, I would venture to guess. But since they mature soon enough, it seems likely that principal will have to be impaired also.
Remember, the central bank needs to accumulate fx reserves, so higher coupons for external bondholders makes this more difficult. That's also why they cannot possibly repay the IMF SDR rate plus surcharge.
Now, if there are capital inflows and reserve accumulation, per Marci, that might not solve the problem as BCRA needs to be able to pay the interest on this, so they need to be set aside the resources to do so.
This is complicated and super interesting, of course. If you see any good sustainability assessments please let me know. You can email me at chris.marsh@exantedata.com.
Great post. Interestingly, many economists here in Argentina claim that the remunerated liabilities of the BCRA are not a problem. As I see it, the only way to stabilize the macroeconomy is to bailout this "borrower of first resort". Otherwise, same chronic inflation (or a purging hyperinflation) awaits
But if these liabilities are reduced in size or increased in duration then they are less risk to the currency and inflation.
Local economists don't have a strong record when it comes to monetary stability.
I agree :)
Thx
If the main problem is the flow rather than the stock of debt, how can an external creditor, i.e. a US/EUR-denominated bondholder, do his part? Coupons already have a shallow annual interest, between 0.5% and 4%. Added to this is that the first critical deadlines for capital repayment are 2030, 2035 and 2038. Bondholders have been asked to do their part many times in the last twenty years; the latest restructuring dates back to 2020.
First, IMF interest (SDR rate plus surcharge) requires interest payments in excess of USD20bn over the next decade. This needs relief.
Second, these coupons step up, so if they are refinanced near current interest rates they would be a greater burden still. Indeed, they could not be refinanced at the moment. So some reduction in the stock or further coupon relief is likely crucial.
No-one has done the maths properly that I'm aware of.
In the previous message, I was excessively brief about the annual interest Argentina pays foreign bondholders. Even though the coupons have a step-up structure, the state pays, would pay, low annual coupons for a country with a significantly higher risk profile than, for example, its neighbours Brazil, Peru and Uruguay.
An instant after reading the terms of the latest debt restructuring, every investor knew that there would be another one soon. But I don't think it was a question linked to coupons but instead to the country's ability to implement effective economic policies to solve structural problems.
Now, many investors and analysts think a new debt restructuring will occur at the end of 2024 or early 2025.
If the problem is the flow rather than the stock of debt, it means that a haircut would not be necessary. So what is left to ask of bondholders, after everything that has already been asked in the past? It seems to me that the only three things that remain are: (1) further cut coupons, (2) extend the bond maturities; 3) repay the capital in an amortized manner.
Finally, a personal consideration: it is right that every party involved in this mess does their part, but in many years as an investor I have never forced any company or sovereign state to borrow more than it was capable of. Although I am sorry for the social situation of the Argentine population, they must understand once and for all that the bad guys are not the international bondholders or the IMF, but themselves, as the politicians who have mismanaged them are their direct expression.
Personally, I don't feel responsible for the Argentine situation.
I have always had great respect, although I partially disagree with your final considerations on this occasion.
Happy to talk offline (email below.)
For example: Did you factor in the sustainability of the central bank when you made your investment? Did you think that public debt sustainability could treat each sector in isolation? Would be interesting to understand better.
From my perspective, immediately after the last restructuring it was obvious it would fail because there was no effort to fold in the quasi-fiscal implications of the central bank balance sheet. Of course, there will be no reforms. But the key reform, of the central bank, was never even contemplated by creditors during the debt negotiations.
Back to the case of external debt, if the coupon were kept or forced lower and maturities extended for (maybe) 50 years, then that might be enough, I would venture to guess. But since they mature soon enough, it seems likely that principal will have to be impaired also.
Remember, the central bank needs to accumulate fx reserves, so higher coupons for external bondholders makes this more difficult. That's also why they cannot possibly repay the IMF SDR rate plus surcharge.
Now, if there are capital inflows and reserve accumulation, per Marci, that might not solve the problem as BCRA needs to be able to pay the interest on this, so they need to be set aside the resources to do so.
This is complicated and super interesting, of course. If you see any good sustainability assessments please let me know. You can email me at chris.marsh@exantedata.com.
I will drop you an emailn in the next few days, thanks again.