Thought August 29, 2019 / 08:06 am UTC

Argentina Announces Selective Default to Prioritize FX Intervention

By Priscila Robledo

To our surprise, the government has decided to prioritize FX intervention over repayment of debt, and has effectively announced a selective default of short-term debt held by institutional investors. The stated purpose is to guarantee funds for FX intervention, to ultimately protect inflation and wages.

The measures announced include the unilateral, by decree, extension of the maturity of short-term Treasury debt held by institutional investors ($7 billion according to the government), both USD and peso denominated (mostly LETEs and LECAPs bills). Economy Minister Hernan Lacunza assured that institutional investors will fully receive the interest and principal payments with a three to six month delay. The government could avoid the selective default definition if the delay is made "by agreement."

The government also aims to initiate a process of voluntary extension of maturities of local bonds, subject to congressional approval, and to initiate a process of voluntary extension of maturities for bonds under foreign legislation under the new collective action clauses. In all cases, the government keeps saying that investors will receive the principal and interest payments in full.

Finally, the government also said it proposed the IMF to “re-profile” the maturity of its debt.

The measures come as a consequence of the government losing access to private financing.

The purpose of the decision is to free resources to defend ARS, but we believe that the decision will backfire. Market confidence will be lost and the prospect for regaining market access, which is one of the IMF’s access criteria to keep disbursing funds, will vanish. In other words, the strategy of FX intervention will only make financial needs for 2020 and beyond more challenging, while failing to ease ARS pressures in the short term.

4Cast Ltd. and all of its affiliates (Continuum Economics) do not conduct “investment research” as defined in the FCA Conduct of Business Sourcebook (COBS) section 12 nor do they provide “advice about securities” as defined in the Regulation of Investment Advisors by the U.S. SEC. Continuum Economics is not regulated by the SEC or by the FCA or by any other regulatory body. This research report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nonetheless, Continuum Economics has an internal policy that prohibits “front-running” and that is designed to minimize the risk of receiving or misusing confidential or potentially material non-public information. The views and conclusions expressed here may be changed without notice. Continuum Economics, its partners and employees make no representation about the completeness or accuracy of the data, calculations, information or opinions contained in this report. This report may not be copied, redistributed or reproduced in part or whole without Continuum Economics’s express permission. Information contained in this report or relied upon in its construction may previously have been disclosed under a consulting agreement with one or more clients. The prices of securities referred to in the report may rise or fall and past performance and forecasts should not be treated as a reliable indicator of future performance or results. This report is not directed to you if Continuum Economics is barred from doing so in your jurisdiction. Nor is it an offer or solicitation to buy or sell securities or to enter into any investment transaction or use any investment service.
Analyst Certification
I, Priscila Robledo, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.