Argentina’s Minister of Economy calls for three-year grace period for foreign debt payments

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Argentina’s Economy Minister Martin Guzmán on Thursday called for a three-year moratorium on external debt payments, followed by a sharp cut in interest payments, as part of a plan to restructure the country’s debt and avoid another costly default.

Guzmán said the proposal will be made to bondholders on Friday, who will have 20 days to consider an offer to restructure debt that President Alberto Fernández’s government has deemed unsustainable.

“The reality is that we have failed to come to an agreement with the bondholders on what is sustainable,” Guzmán said during a televised presentation from Buenos Aires. “Today Argentina cannot pay anything.”

Argentina has been in financial turmoil since 2018, when the peso began to depreciate sharply against the dollar amid a crisis of investor confidence. The government of President Mauricio Macri has been forced to ask for a massive bailout from the International Monetary Fund.

Since taking office in December, Fernandez’s cash-strapped government has been working to renegotiate repayment terms with holders of around $ 70 billion in foreign bonds. The government is also seeking to restructure about $ 44 billion that was part of the IMF bailout to prevent the country’s ninth default.

Last week, the government deferred until next year the payment of about $ 10 billion in interest and principal on bonds issued under local law and denominated in dollars.

On Thursday, Guzmán said the government’s offer to creditors called for suspending interest payments from 2020 to 2022. Once debt payments resume in 2023, the government would pay an interest rate of 0 , 55%, which would gradually increase as the economy recovers, Guzmán said.

The minister said the plan would result in a 62% reduction in Argentina’s interest payments, saving the nation some $ 37.9 billion. The proposal also implies a discount of 5.4% on the capital of the external debt, or about 3.6 billion dollars.

Investors say the proposal is unlikely to be accepted by bondholders.

“I understand this offer is not supported by the different groups of bondholders,” said Jared Lou, portfolio manager of emerging markets debt at William Blair, a Chicago-based investment firm. “It’s really hard to focus on what they can afford to pay without a credible plan and to my knowledge I haven’t seen any structural reform or plan that really addresses the history of default and failure. Argentina’s deficit. “

Arturo Porzecanski, an American academic economist who follows Argentina closely, said the most likely outcome is that Argentina will default. He noted that private creditors are reluctant to agree to restructuring without the government first dealing with its next debt payments with the IMF. More than 40% of Argentina’s debt service over the next four years involves repayments to the IMF, Porzecanski said.

“He’s just a non-runner,” he said. “Until they have written assurances from the IMF that the IMF will postpone or refinance or do something about about 40% of the problem, they are not going to deal with the remaining 60%.”

Fernández, a member of the Peronist nationalist movement, said his country was already in “virtual default”. He said the country’s financial woes have been compounded by the spread of the novel coronavirus which has forced governments around the world to shut down their economies.

Argentina’s economy is expected to contract 5.7% this year, according to the IMF, as aid workers on the poor outskirts of Buenos Aires say they have seen an increase in demand for food in soup kitchens. In 2019, Argentina’s economy shrank by 2.2%.

Giving up debt payments this year would save Argentina about $ 4.5 billion, or about 3.2 times the health ministry’s annual budget, according to the government.

“The crisis is huge,” Fernández said. “What we are committing to today is what Argentina will be able to accomplish.”

Write to Ryan Dube at ryan.dube@dowjones.com

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