Argentine President Mauricio Macri, left, and opposition candidate Alberto Fernández, after a presidential debate in Buenos Aires, Argentina, on Oct. 20.
Source: AP Photo
As presidential elections draw near in Argentina, financial analysts remain skeptical that opposition front-runner Alberto Fernández will merely extend debt maturity, as incumbent President Mauricio Macri has already done on short-term debt. They believe he will do much more than that, and investors are preparing for a considerable haircut.
On Oct. 27, Argentines will head to the polls to choose between incumbent market-friendly President Mauricio Macri and Fernández, a former cabinet chief under the populist Kirchner governments. Regardless of who wins, debt restructuring will be at the top of the next president's agenda, experts say.
When Fernández trounced Macri in the Aug. 11 primaries by 48.25% to 32.49%, markets reacted with force, seriously impacting the Argentine currency and bond prices. However, the most recent polls suggest that the advantage from the primaries by the Fernández-Fernández ticket, which includes former president Cristina Fernández as Alberto's running mate, has not decreased despite market volatility.
Fernández has given few signals about how he will tackle rising levels of Argentine debt, which are expected to reach 100% of GDP by year-end. The scarcity of insights into his economic policies during his campaign has left investors at a loss to understand what a new Peronist rule could mean to an ailing economy and roughly $335 billion of public debt.
Already, Macri has put bondholders on standby as his government decided to postpone payments on short-term obligations until the beginning of the new administration. On Aug. 28, after weeks of turmoil following the preliminary elections, Macri modified payment schedules on short-term debt, while also proposing a bill to Congress to address restructuring medium and long-term bonds issued under local law. He also started negotiations related to debt under international jurisdiction. However, these last two items have been left for the next president to tackle.
Fernández has said he would seek a so-called "Uruguayan" style of debt renegotiation, referring to the South American country's 2003 extension of payment terms that did not include a haircut. Analysts, however, believe such an option is no longer viable for Argentina.
"I strongly rule out the Uruguayan scenario. Numbers simply do not add up. Argentine U.S. dollar stock is very low and 80% of public debt is nominated in dollars," Fernando Baer, an economist with Quantum consultancy, said in an interview.
With Argentina's current primary deficit and debt servicing costs already surpassing 3% of GDP, the fiscal effort required to support a no-haircut go would be "unrealistic," Baer said. "It is a historical threshold which has triggered debt crisis in the past with sizable restructurings needed to alleviate the burden."
Sovereign bond prices are already pricing in steep cuts on principals, trading at about 45 cents to the dollar. Credit default swaps, a widely used measure of risk, have more than tripled since Aug. 11 and now suggest a 90% chance of default over the next 5 years.
"A debt restructuring process beginning as soon as possible looks like a done deal," Ezequiel Zambaglione, head of research at Balanz Capital, wrote in a note. The firm calculates that in order to avoid a haircut, the next president would need an economic program that can muster an extra 5 to 6 percentage points of GDP growth.
"This is very difficult to imagine considering Kirchnerism's track record," he added, in reference to the previous populist governments under the late Néstor Kirchner and Cristina Fernández de Kirchner.
Back in 2005, Guillermo Nielsen, who is now a top economic aide for Fernández, played a key role in the restructuring of debt with a 65% haircut for bondholders. Argentina managed to rebuild its public accounts as a result, but was effectively cut off from international debt markets for roughly 10 years.
Given the pressing needs of Argentina's economy, given its currency controls, lingering recession and inflation readings topping 50% in the past two years, analysts believe the next president will try to remain close to international markets and under financial assistance from the International Monetary Fund. That could result in a milder stance on investors.
"Unlike Macri, Fernández will have to build credibility from scratch. Governing with Kirchner weighs in and a lot." Argentine economist Esteban Domecq said in an interview. "If he wins, Fernández will receive a very damaged economy with no foreign reserves stock, market access or support from the International Monetary Fund. He will have to coexist with all those things," he said.
With the $6.4 billion in disbursements scheduled for 2019 virtually frozen since the elections, new IMF head Kristalina Georgieva said the entity is "very interested in getting to know the framework of (economic) policy that will be implemented" before negotiating a new deal like an extended fund facility program.
According to ING economist Gustavo Rangel, the new leadership at the fund and "less amicable" relations between Fernández and the U.S. should result in less lenient terms of any new agreement provided by the IMF. In order to straighten growing debt to GDP ratio trajectory, the IMF could eventually demand steep cuts on private bondholders for it to release new funds. A similar IMF-led restructuring processing frequently brought up is that of Ukraine in 2015, in which a cut in the vicinity of 30% was applied.
Whatever the outcome of the election, one thing seems certain to analysts. As Rangel said in a report, "financial markets should brace for more volatility."