Argentina’s bondholders are braced for steep losses when the government attempts to tackle its $101bn debt burden after downbeat meetings with IMF officials and associates of Alberto Fernández, the presidential frontrunner, in Washington last week.
More than 20 bondholders met a team of IMF officials to discuss the outlook for Argentina ahead of the country’s general election this Sunday.
The officials said they would need to be assured “with a high probability” that the country’s debt was sustainable, a reference to the Fund’s technical conditions for extending new funds in a renegotiated programme, according to one bondholder at the meeting.
Those present interpreted the IMF’s comments to mean that bondholders would incur losses on their investments, also known as a “haircut”, according to people briefed on the discussions. “The IMF doesn’t want a small haircut, but a big one,” the bondholder said, adding that the IMF did not want to be accused of using public money to bail out creditors.
Mr Fernández is expected to beat the incumbent Mauricio Macri in Sunday’s presidential election. Mr Macri’s efforts to introduce market reforms in Argentina came unstuck, leading to a record $57bn IMF bailout last year.
Mr Fernández, the leftwing Peronist running on a ticket with the former president Cristina Fernández de Kirchner, has previously endorsed an Uruguay-style restructuring, in which bondholders give the government more time to pay back its debts without an explicit haircut.
But that type of restructuring looks increasingly unlikely to some money managers because they say the data point to a country facing a solvency problem rather than just an immediate lack of available funds.
Analysts expect that the country’s debt will soon reach 100 per cent of GDP, sparked by the peso’s sharp slide after primary elections in August, which hurt the country’s ability to repay its huge stock of foreign-currency debt.
Senior IMF officials have not yet publicly committed to a particular course of action on the Argentine bailout.
“We have to make a comprehensive evaluation of fiscal policy in order to give a [more definitive] assessment on debt sustainability,” said Alejandro Werner, director of the western hemisphere department of the IMF. “We do that in the context of each review of our programmes . . . in which we have a clear view on the macroeconomic framework, and we have public policies in place for the next five years.”
The IMF said that neither Trevor Alleyne, the Fund’s representative in Buenos Aires, nor any other officials made any reference to a haircut for investors at last week’s meeting.
Guillermo Nielsen, an economic adviser to Mr Fernández, acknowledged the parlous financial situation at a dinner in Washington on Friday. Mr Nielsen hardened his stance on how much pain would need to be inflicted on creditors, according to people with knowledge of the discussion. He also hinted that a Fernández administration would not move aggressively to rid the country of its fiscal deficit, a stipulation of the current IMF programme.
Without a firm pledge from Mr Fernández that he will commit to fiscal discipline, investors could end up recouping less than 40 cents on the dollar when the country eventually restructures its debts, say analysts.
Investors came away from the two meetings with the view that “the mood for Argentina . . . is now much less positive than before,” said a person who spoke on condition of anonymity.
Meanwhile, some of Argentina’s largest bondholders also met to informally discuss their strategy for the forthcoming negotiations with Mr Fernández, should he win Sunday’s election.
Representatives from Greylock Capital, Pimco and Pharo Management were among those attending. Several at the dinner advocated for a maturity extension on the debt and warned that too harsh a haircut will effectively shut out Argentina from the bond markets for several years, according to a person briefed on the discussions. The creditors have not yet formed a committee nor hired financial and legal advisers.
Additional reporting by Benedict Mander in Buenos Aires