[Debt] Debt talks between the government and bondholders have stalled, and may have derailed. The Treasury exposed their offer to private creditors and their counter-proposals. The average official NPV moved up from USD 41 to USD 51 (or USD 54, including the value recovery instrument), and creditors NPV moved down from USD 61-62 to USD 55-60 approximately (depending on the bondholder group). The debt cash flow relief totals USD 37-40bn until 2030 and of USD 7-12bn until 2050, lower than those of the previous proposal (USD 45bn and USD 16bn, respectively).
Differences do not only lie in the size of payments. Some bondholders propose that accrued interests are partly paid in cash (vs. official proposal of issuing a bond) and prefer a GDP warrant rather than export linked instrument. Creditors are also requesting 2005 indentures, which offer more legal protection
Where do we go from here? Negotiations have stalled. The government is in a position of relative weakness, with the activation of acceleration and cross-default clauses still possible and trust between negotiators broken. A way out of this conundrum, if there is any, should come from politics, meaning that Alberto Fernández has the key to unlock the situation. He can choose to forego a few billion dollars of cash relief, close a deal and move forward with his hard-pressed economic agenda or push the country into an open-ended litigious default, which would affect most of his presidency.
[Markets] The Treasury will issue up to USD 1.5bn to contain pressures on the BCS stemming from offshore holders of ARS denominated debt. Also, it was able to raise ARS 135bn to face the expiration of the TJ20 (mostly held by PIMCO). Between this bond and a Badlar indexed bill, the Treasury faces net maturities of approximately ARS 145bn next week. This announcement reduces pressure on forex market premiums. Although it is probably not the only reason. The effects of BCRA regulation and a (slightly) less accommodative monetary policy help explain the decrease of the BCS premium from 67.2% last week to 57.4%. Meanwhile, the informal FX premium stands at 82%.
[Prices] Late May inflation acceleration proved transitory, and MULC regulations have not yet perspired into prices, beyond some dollarized product hikes. Ourhigh-frequency CPI printed another low 0.3% WoW this week (same rate as the previous week) and Monthly inflation is running at 2.3%. The inflation dynamic looking forward will depend mostly on the ability of the Central Bank to control the official FX rate. In this regard, fiscal dominance of monetary policy is piling up imbalances that could destabilize the forex market, even in the presence of tight (and increasing) capital controls.
[Debt]
Debt talks between the government and bondholders have stalled and may have derailed. After the expiration of the NDAs, the Treasury decided to release its offer to private creditors alongside their counter proposals, revealing the differences between both parties (and within them as well). The average NPV of the official proposal moved up from USD 41 (at a 10% exit yield) to USD 51 (or USD 54, including the value recovery instrument -VRI-linked to exports). Meanwhile, creditors have reduced their demands from USD 61-62 to USD 55-60 approximately (depending on the bondholder group).
Differences are not only about the amount of payments. Some bondholders propose that accrued interests are partly paid in cash (against the official proposal of issuing a bond) and even propose a GDP warrant instead of an export linked instrument. Furthermore, some creditors are requesting that new bonds are under 2005 indentures, which offer them more legal protection than the newer contracts. The most debated issue is the ability of the government to re-designate bonds in order to artificially increase acceptance levels and impose changes on debt contracts to all creditors.
USD Private Debt Service: Current profile vs Latest official proposal
The latest official offer reduces savings arising from the debt exchange. The debt cash flow relief totals USD 37-40bn until 2030 (depending on whether the export VRI activates or not) and of USD 7-12bn until 2050. Savings from this offer are lower than those of the second (USD 45bn and USD 16bn, respectively) and first (USD 55bn and USD 20bn, respectively) proposals.
USD Private Debt Service: Latest official proposal vs previous
Where do we go from here? Negotiations have stalled. The government is in a position of relative weakness, with the activation of acceleration and cross-default clauses still possible and trust between negotiators broken. A way out of this conundrum, if there is any, should come from politics, meaning that Alberto Fernández has the key to unlock the situation. He can choose to forego a few billion dollars of cash relief, close a deal and move forward with his hard-pressed economic agenda or push the country into an open-ended litigious default, which would affect most of his presidency.
[Markets]
Uncertainty about debt negotiations has hit financial assets. The global financial market had a relatively calm day (an increase of Chinese stocks, stable S&P, and slight decreases in Europe and rest of Asia), though the local stock index dropped 6.1% and ADRs fell an average of -6.6%. Bond prices also suffered (with a fall as strong as -6.9% of the DICAD) and country risk closed this Thursday at 2,614bps (+60ps daily).
Sovereign Spread of Selected Countries
The government unveiled a strategy to contain pressures on the BCS stemming from offshore holders of ARS denominated debt. The Treasury will issue up to USD 1.5bn in 3 new instruments (under local law), accessible only for international investors in exchange for their holdings of ARS denominated debt. Issuances will take place in August, September, and November, though the Treasury said there will be more in 2021. The idea behind this move is to reduce demand on the BCS market over the short-term, at the cost of future use of international reserves.
This explains the results of this week’s ARS debt issuance. The Treasury was able to raise ARS 135bn across 6 instruments (5 bills due in 2020 and a bond maturing on 2021), enough to face the expiration of the TJ20 (mostly held by PIMCO). Between this bond and a Badlar indexed bill, the Treasury faces net maturities of approximately ARS 145bn next week.
Exchange Rate Premiums
This announcement reduces pressure on forex market premiums. Although it is probably not the only reason. The effects of BCRA regulation and a (slightly) less accommodative monetary policy help explain the decrease of the BCS premium from 67.2% last week to 57.4%. Meanwhile, the informal FX premium stands at 82%.
[Prices]
Inflation remains stable at low levels. After some acceleration registered in May, the latest high-frequency data shows that consumer prices have increased 0.3% WoW (same rate as the previous week), with core inflation at 0.1% WoW (down from the previous 0.4% WoW). Monthly inflation is running at 2.3% (core inflation at 2.6%) and is now starting to decelerate (see graph). Our inflation forecast is now back on the 2.0% range.
Weekly and Monthly inflation rate: General Level vs Core
The distribution of price variations has remained relatively stable. In April and part of May, the distribution changed in favor of lower increases and even price reductions. This trend reversed in mid-May (not casually, when weekly inflation accelerated), though the distribution is not completely back to its pre-lockdown shape. There still remains a significant share of prices that are presenting zero or negative variations.
Short-term inflation is expected to remain subdued. Regulated prices incidence is minimal and the official FX is crawling at a low rate. Meanwhile, price controls closed firms (due to the lockdown), and a sharp fall of aggregate demand keep prices frozen or even force reductions. From June onwards, the inflation dynamic will depend mostly on the ability of the Central Bank to control the official FX rate. In this regard, fiscal dominance of monetary policy is piling up imbalances that could destabilize the forex market, even in the presence of tight (and increasing) capital controls.
