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.


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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.