Boston - Here's our take on the latest debt restructuring news out of Argentina and Ecuador.
Argentina reaches deal with creditors
Early on August 4, the Argentine government announced that it reached a deal with three creditor groups. If all goes as planned, the restructuring should be wrapped up by the end of the month. Importantly, given the amount of bonds held by the three groups, it is likely we could have a deal without any holdouts, which would be a very positive outcome.
While this deal does not make a large dent in the overall debt stock, it does provide enormous savings on coupon payments for the coming years. The monetary savings will be very important for Argentina's recovery because this capital can be invested back into the economy.
Given the risks for both sides — the Argentine government and the creditors — if restructuring discussions fell apart, we always thought a consensus deal would be reached. However, we were still surprised at how quickly this all came together, especially in the midst of a pandemic.
Domestic conditions remain extremely challenging in Argentina: the virus situation is not improving, the economy is very weak after multiple shocks, and the foreign exchange market is broken — with a wide gap between official and black market rates. Additionally, Argentina still owes $44 billion to the IMF. Authorities need to negotiate a new program in order to improve debt sustainability.
Furthermore, we still do not have a sense of any real policy prescriptions to deal with these governmental challenges. The administration claims that it has been working on a number of proposals, so hopefully we will have some clarity in the coming months.
The initial market reaction to the deal has been positive, as we would expect, although prices suggest very high exit yields of 11% to 12%. That indicates a large amount of skepticism — we think rightly so — with a likely Peronist agenda over the coming years.
Ecuador announces near 100% participation to restructuring offer
On August 3, the government of Ecuador announced close to 100% participation in its restructuring offer. Importantly, nearly all holders of the 2024 bond (which had stronger legal language) agreed to tender.
Like Argentina, Ecuador also needs to renegotiate its current program with the IMF, after it was barely able to pass the previous reviews. Due to Ecuador's less than encouraging reviews, it is unclear what a new program will look like and how much the IMF will ask for in terms of fiscal consolidation and reforms. On top of that, Ecuador has an election next year, which makes it difficult for investors to discern what policies will be in place over the medium term.
While the restructuring provides a large amount of near-term debt relief, we think it does nothing to change the underlying issues of the Ecuadorian economy - one that burns through dollars every month, only to be replenished through external sources (bond issuances, multilateral support and oil-back loans). The policy solutions exist, and the current government attempted some needed reforms last year with little success, but wholesale changes will require buy-in from the entire population.
Bottom line: For both Argentina and Ecuador, restructuring announcements reflect important steps toward economic sustainability and reform as the countries try to get back on track, but much work remains to be done. Investors are waiting to see how and if the necessary reforms can be implemented during these challenging times.