Argentine bonds jump higher, shaking off default fears ahead of deadline

Forex
© Reuters.  © Reuters.

By Walter Bianchi, Cassandra Garrison and Rodrigo Campos

BUENOS AIRES/NEW YORK (Reuters) – Argentina over-the-counter bonds jumped an average 6.4% on Friday even as the South American country races to strike a deal to restructure $ 65 billion in foreign debt and avoid a default by a deadline at the end of next week.

That took the rise to over 10% for the week after the government of center-left Peronist Alberto Fernandez had earlier extended the deadline for a deal to May 22 after an initial cutoff for a deal passed without it gaining sufficient support.

Argentina, a major grains producer, is racing to revamp debts it says have become unsustainable after two years of biting recession that is set to deepen this year with the impact of the coronavirus pandemic.

The extension and signs of flexibility from officials have raised slim hopes a deal could be struck in time, helping keep the country from slipping into a ninth sovereign default.

Economy Minister Martin Guzman said on Friday that talks had been “positive” but the government had not yet received any new counter-offers from bondholders since rejecting one from BlackRock (NYSE:) Financial Management in April.

“We know that creditors have been working hard in getting together to make an alternative proposal,” Guzman said in a virtual conference, where he acknowledged Argentina’s troubled history of defaults.

“Argentina has a turbulent history which damaged the relationship with investors many times,” he said. “That’s what we want to change.”

DEFAULT INEVITABLE?

The ball appears to be in the court of bondholders.

“With the extension of the deadline, it’s the creditors’ turn to present improvements in the offer details that may or may not be accepted by the government,” local brokerage Portfolio Personal Inversiones said in a note.

Argentina’s original offer – including a three-year payment halt, a large coupon reduction and maturities being pushed to 2030 and beyond – got firmly knocked back by major creditor groups, who say the country can pay more.

The national government is also facing the end of a grace period on May 22 to pay around $ 500 million in interest payments on bonds included in the restructuring, which could trigger a default if payment is not made and a deal is not struck.

“The default next Friday appears almost inevitable,” said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities, adding that Argentina needed to come up with a “credible offer”.

“All defaults are unique. Argentina cannot choose a path of inward isolation like they did in the 2000s. The externals aren’t as favorable and they have no growth and no liquidity,” she added, referring to a major default in 2001.

Argentina’s black market peso also fell on Friday, taking it even further away from the official spot rate. The two rates are more than 100% apart, with the large gap being driven by strict capital controls, low real interest rates and inflation.

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