By Hugh Bronstein
BUENOS AIRES (Reuters) – Argentine bonds took a beating on Thursday after the economy minister warned that a “deep debt restructuring” was on the way, and promised to take a tough stance with creditors while refusing to impose fiscal austerity on the shrinking economy.
Over the counter bond prices <RPLATC> fell an average 2% while Argentina’s risk spread <11EMJ> shot out 118 basis points to 2,068 over safe-haven U.S. Treasury paper.
Late on Wednesday, Economy Minister Martin Guzman told Congress that while pushing out bond maturities he would not try to cut the primary fiscal deficit this year, saying that austerity was never a good idea for an economy in recession.
He warned that the restructuring would likely be “frustrating” for bondholders. “But we will not allow foreign funds to set the tone for macroeconomic policy,” Guzman added.
Citi Research, in a note to clients, referred to the comments as “anti-market rhetoric.”
“The focus to make the debt sustainable without an imminent fiscal adjustment does not bode well for bondholders,” it said.
The only country with a higher perceived risk of default than Argentina is Venezuela, according to JP Morgan’s Emerging Markets Bond Index Plus. Venezuela’s spread was an eye-watering 12,990 basis points over treasuries on Thursday while the index as a whole stood at a relatively miniscule 307 basis points.
On the positive side, the government reported January inflation of 2.3% on Thursday afternoon, well under the 3.7% reported for December. The central bank then cut its benchmark interest rate to 44% from 48%, saying the move was made possible by the easing of consumer price increases.
Lowering inflation is key to Guzman’s economic plan. He says debt restructuring is necessary to avoid the inflationary practice of printing pesos to pay for the debt inherited from the previous government, which he calls unsustainable.
The country’s biggest creditor, the International Monetary Fund (IMF), has sent a team of economists to Buenos Aires to hammer out a plan for the government to repay the $44 billion it owes the multilateral lender. The deal will set the stage for restructuring talks with bondholders.
“This will be a complex negotiation, but I believe the Argentines understand there is a limit to how much pain they can impose on the bondholders,” said Alberto Bernal, chief emerging markets strategist at XP Investments in New York.
The government says it needs to push out maturities of about $100 billion in bonds and loans to give breathing room to an economy asphyxiated by crushing debt.
On Tuesday, the government ruffled the market when it unilaterally postponed a $1.47 billion principal payment on its AF20 bond from Thursday until Sept. 30.
“The AF20 was very poorly handled, but I still believe that there is some merit in deciding not to print money to pay for that amortization,” Bernal said. “It shows that the government understands the clear causality that exists between printing pesos and deterioration of inflation expectations.”
Latin America’s No. 3 economy is expected by private analysts to shrink 1.5% in 2020, with inflation seen easing to 41.7% from over 50% currently.
Guzman and the fund say initial meetings have been constructive. But IMF spokesman Gerry Rice warned that the fund’s ability to grant debt forgiveness was limited.
“The capacity of the IMF to restructure debt, to postpone repayments, is constrained by our legal and policy frameworks,” he told reporters in Washington.
(Reporting by Hugh Bronstein; additional reporting by Walter Bianchi, Eliana Raszewski, Cassandra Garrison and Hernan Nessi; editing by Bernadette Baum, Grant McCool and David Gregorio)