January 3, 2020 / 3:01 PM / 15 days ago

Breakingviews - Argentina debt do-over is even chancier than usual

Argentina's President Alberto Fernandez holds the symbolic leader's staff, next to new Vice President Cristina Fernandez de Kirchner, after he was sworn in as Argentina's next president, in Buenos Aires, Argentina December 10, 2019. REUTERS/Agustin Marcarian

NEW YORK (Reuters Breakingviews) - Sovereign debt’s bad boy is back. Argentina, the eight-time defaulter, is on the hook for around $100 billion of hard currency debt held in private hands, just part of its hefty borrowings. The International Monetary Fund may complicate new President Alberto Fernandez’s plans for a quick debt fix, with wonky new bond features making the outcome even chancier than usual.

The dwindling liquid cash reported by the country’s treasury won’t even cover next year’s roughly $10 billion in private-lender interest, let alone principal. The Fernandez administration, which took office on Dec. 10, has signaled it prefers a so-called reprofiling to anything more drastic. That normally means maturities would be pushed out a few years, but interest rates and principal amounts due would be unchanged.

The IMF may nix this. The fund gave Argentina a $57 billion credit facility in 2018. No rejig of government debt will happen without its agreement. And its debt-sustainability analysis is unlikely to deem this a simple liquidity issue, especially factoring in the debtor’s history.

So a harsher restructuring is more likely. Citigroup has suggested that private lenders ought to be the biggest losers, with some interest payments cut by about 65% and maturities kicked out by around 10 years. Markets are also gloomy. Argentina’s benchmark U.S. dollar bond maturing in 2028 was trading at around 40 cents on the dollar in early December.

Further drama might come from a seemingly boring source: new legal language. Argentina added so-called single-limb collective-action clauses to recently issued debt. These force owners of specific bonds to accept a deal approved in a vote by 75% of holders of all issued bonds, making it harder for a small group of creditors to hold out, as Elliott Management and a few others famously did last time around. But a related clause says a deal must be “uniformly applicable” to all parties, and this can be interpreted in many ways.

Finally, the so-called pari passu clause – the boogeyman of Argentina’s last restructuring, a provision traditionally understood to give different bonds equal legal ranking – could even become an issue again, with new clarifying language apt to be tested in U.S. courts. The only certainty is that the outcome of the country’s likely debt do-over will, once again, change the wider sovereign debt landscape.

This is a Breakingviews prediction for 2020. To see more of our predictions, click here: bit.ly/2QCkYW5

Breakingviews

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