Argentina's Joust With Bondholders Likely To Drag On Beyond Friday

A war of nerves between Argentina and international creditors over restructuring its massive debt is likely to continue unabated past a Friday deadline, analysts say.

The sides are deadlocked after the three main bondholder groups rejected the government's restructuring offer, unwilling to swallow "disproportionate" losses on their investment.

Argentine Economy Minister Martin Guzman has taken an aggressive stance on debt, in part driven by a need to free up resources to fight the novel coronavirus pandemic in the recession-hit South American grain and beef exporter.

He said this week that his government, though willing, "does not have the capacity to pay."

No one in Buenos Aires' financial or political circles believes negotiations will end Friday.

The dogfight with bondholders is likely to continue until May 22, the end of a 30-day grace period for a $500 million bond payment Argentina has already missed.

Failure to pay would mean a default, a near doomsday scenario for the cash-strapped country that would prevent Argentina from seeking credit from the financial markets.

"Default is not in anyone's interests," says Matias Rajnerman, an economist with analysts Ecolatina.

As it stands, Argentina's offer to bondholders includes a three-year grace period on debt repayment, a 62 percent haircut on interest amounting to $37.9 billion, and 5.4 percent on principal -- or $3.6 billion.

"Argentina saying that this is its final offer doesn't mean that it is -- it's a negotiating position," said Victor Beker, head of the Center for Economic Studies at Argentina's Belgrano University.

By the end of 2019 Argentina had accumulated a massive $323 billion debt, equivalent to 90 percent of its GDP.

Forty-four billion dollars of that debt is owed to the International Monetary Fund, part of the $57 billion bailout in 2018 to the previous center-right government of president Mauricio Macri.

His successor, President Alberto Fernandez, who took office in December, rejected the last tranche of the money, saying the last thing his country needed was more debt it could not afford to repay.

"The room to make improvements is limited," Eurasia's Daniel Kerner said in a note ahead of Friday's deadline.

"The administration will likely wait for bondholders to make a proposal and could accept it if it is within its objectives, especially in terms of lowering interest rates and maintaining a long grace-period."

Fernandez has an unlikely ally in the IMF, which deemed Argentina's debt "unsustainable."

This week the government also won support from large employers, workers' unions and the country's regional governors over its debt restructuring stance.

Two years of recession have dragged the economy down, and this year's GDP is expected to contract more than 6 percent, as exports have plummeted.

Fernandez insists that Argentina is prepared to pay its debts but not at the expense of the country's social needs, which have increased multifold with the pandemic.

Argentina won some respite as it managed to postpone a $2.1 billion debt payment to the Paris Club of creditor nations, which was due Tuesday, a government source told AFP.

"It is likely that the government will extend their offer until May 22 and that they open a negotiation channel," said Ignacio Labaqui, a senior analyst at Medley Global Advisors.

"If it doesn't go well, they'll have to choose between paying or a default," he said.

Argentina received support Wednesday from Nobel laureates Joseph Stiglitz, Edmund Phelps and more than 100 other economists from 20 countries.

In an open letter, the renown economists said the offer "reflects the country's capacity to pay," and urged the bondholders to accept its "reasonable" offer.

In Buenos Aires, analyst Carlos Fara says he believes the tense negotiations will go right to the wire.

"I do not think we will have news until May 22. The situation is tense. I don't predict a quick solution," he said.