Financial markets reacted negatively on Aug. 29 to the decision by the Argentine government to redefine payment schedules on short-term debt, with stock markets and bonds showing losses of between 5% and 10% on the day and the Argentine peso further receding in value.
Given the turmoil and uncertainty, several mutual funds in Argentina froze redemption operations for the day, financial sources say, as fund managers and investors were trying to digest the full extent of the plan.
"I think everyone is still trying to understand what’s happening," Hans Humes, CEO at U.S. Greylock Capital, responded to S&P Global Market Intelligence. "Is the government panicking?" he asked.
Finance Minister Hernán Lacunza announced Aug. 28 that the government will present bondholders with a plan to reprofile maturity dates on over $100 billion worth in short and medium term debt in a bid to alleviate the financial burden on public accounts.
A day later, S&P Global Ratings downgraded Argentina's sovereign credit ratings to selective default, as it considers the unilateral decision to extend the maturity of its short-term debt as a default. However, the ratings agency added it intends to upgrade the sovereign credit ratings to CCC- from selective default today as the new conditions of the short-term debt took effect immediately, meaning the default has been resolved.
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Institutional investors holding treasury notes such as Letes, Lecaps, Lecer and Lelinks in their portfolios will have their maturity dates extended. In a document, the government explained 15% of capital would be paid at the original maturity date, while 25% would be disbursed three months after and the rest over six months. Individual investors were left out of the reprofiling, as finance minister Lacunza put it.
"There is a need to create conditions that allow the financial program to be fully recomposed, starting with short-term commitments," the decree signed by president Mauricio Macri read. With the short-term re-profiling, market sources believe the relief on the burden might round up to $9 billion in 2019. S&P Market Intelligence contacted the financial ministry, but did not get a timely response on exact figures.
Meanwhile, an abrupt fall in local financing has left Argentina without a key source of funding. With foreign markets already closed, and growing reluctance from local investors to renew financial instruments since the primary elections, the IMF is now the country's sole lifeline.
Argentina needs to refinance a financial gap for the remainder of 2019 estimated at about $12 billion, and until now had relied on local rollover to meet the target. On Aug. 28, the Letes auction was canceled when rollover rates fell from an average of 88% before the election to virtually zero.
According to Lacunza, there will now be excess capacity to meet trimmed 2019 obligations with public sector financing, cash positions and a pending $5.4 billion disbursement from the International Monetary Fund.
"The measures prioritize the use of foreign reserves to preserve financial and monetary stability, even though it implies delaying payments to big investors of public debt," Guido Sandleris, chief of Banco Central de la República Argentina, said in a statement.
As for the IMF, it remains unclear whether the installment will eventually come through. The decision to safeguard foreign reserves to temper the exchange rate at the expense of reprogramming debt might be ill-received, analysts say.
The government also began a legal process for restructuring medium-term bonds, in an attempt to avoid a haircut. It will send a law to Congress for debt issued under the Argentine law, as well as begin discussions at international levels for foreign-law issuances. The government said it ruled out a legislative pit stop on short-term debt restructuring given the "urgency" of the matter.
But analysts are skeptical on the outcome of the broader process.
"It's an electorally delegitimized government," Enrique Zuleta Puceiro, an Argentine political analyst, said in an interview, stressing that it will be very difficult for Congress, which has barely held sessions in the first half of the year, to approve Macri's bill.
"The process of debate on debt restructuring under local law in Congress has a complex path in the middle of an election period where political forces are farther than ever to reach consensus," Nicolas Max, research head at local broker Criteria, said.
"To be successful, voluntary restructuring plans require a comprehensive plan where creditors see an improvement in their probabilities of collecting before relinquishing contractual rights. In this case there is no plan, since the current government will most likely not be the same as of December 10," he added.
The economic ministry said it was already in touch with international banks to receive reprogramming proposals for bonds under foreign jurisdiction with maturity dates within the next ten years.
Argentine public debt servicing for the 2019 to 2020 period amounts to $113.8 billion, while roughly below $200 billion mature in the 2021 to 2025 period, data compiled by S&P Global Market Intelligence shows.
Provincial bonds, as well as Bonte 2020, 2021, 2023, 2026, and PR13 and PR15 and longer term bonds such as Discount, Global 2036, Global 2046, 2047, Global 2048, Global 2117 and Bonar 2037 are expected to be excluded from the program, the government said in its official presentation.

