Massa to Meet with Bankers and Insurers to Conclude Peso Debt Swap: Full Details

Amid the havoc the drought has begun to wreak on Argentina’s economy, Sergio Massa it was proposed to clear up other dark clouds that lurk especially from the financial point of view. as you mentioned yesterday GlobeLiveMediathe Minister of the Economy will have a meeting tomorrow at noon with the main bankers and executives of insurance companies with the aim of settling in a resounding manner the maturities of the debt in pesos which are accumulating in the months to come and particularly in the second trimester, just before MARCHER.

The entities will receive new bonds issued by the Treasury in two ways: 80% of the new bonds will be adjusted by the CER and 20% will be dual bonds, which will provide a hedge against a rise in the official exchange rate. The latter are key to extending terms, as investors fail to take into account that after the election there will be honesty in the value of the dollar. Exchange rate unification may take time to arrive, but it will be inevitable for the future government to attract investment.

Major investors have actively participated in the tenders for securities launched by the government. However, they demand higher and higher interest rates (up to 119% per annum in the last one) and shorter terms. PASOs have become something of a “wall” for debt placement, perhaps because of memories of the crisis that erupted four years ago when Alberto Fernandez swept away in the primary elections.

The Treasury will issue to those who will participate in the exchange new peso bonds with staggered maturities for 2024 and 2025. The reading is simple: it is not only a question of clearing the horizon of maturity which the current government must face , but also to allow the future administration towards a more comfortable start of the debt in local currency.

Debt maturities exceed 6 trillion pesos through July. The aim is for the majority to enter the exchange, although the Ministry of Economy itself recognizes that it is impossible to achieve 100% acceptance. Among the holders of these titles, there are also companies and individuals. At least part of this universe could choose to wait for the bonds to mature to dollarize and wait for the election result. But this is clearly a much smaller amount compared to those who would end up accepting the bond swap for significantly longer terms.

If the maturity horizon in pesos is sufficiently open, the risk of a currency shock in the run-up to the elections is considerably reduced. The greatest danger is precisely that peso bondholders seek dollar cover instead of refinancing as STEP approaches. With trade, the odds of this scenario drop dramatically.

The operation will also be accompanied by a decree to proceed with an intra-public sector debt swap. In other words, peso bonds issued by the Treasury that are in the hands of ANSES, BCRA and other departments will automatically enter the transaction. Most of this debt matures in the second half of this year.

From the opposition, they have already demonstrated lukewarmly in favor of this initiative. It was first during a lunch that Patricia Bullrich held with Adeba bankers two weeks ago. There they discussed the need to provide a predictable horizon to channel the large peso debt incurred by the Treasury. But also this week was martin tetaz, economist and representative of Juntos por el Cambio, who spoke more openly: “If it’s not something compulsive, welcome a swap of debt for pesos. It’s not convenient for us or anyone else for it to blow up in the coming months.”

The week will be very busy in terms of announcements. Not only because of the negotiations related to the debt in pesos, but also because it is imminent that the IMF will disclose the more flexible reserve targets that it will require of Argentina for the next four quarters.

Although it was revealed that the news would arrive last Tuesday, the negotiations were eventually extended and confirmation from Washington would only be available for the first few days of this week.

The delay is related to the difficulty of estimating the impact that the drought will have on the total volume of exports. Avian flu and the ban on chicken exports have also entered the equation. They’re only $320 million, but they hit between May and August, so economics techs called for it to be considered for the third-quarter target close as well.

The differential exchange rate that will be applied to exports from so-called regional economies will also be included in the equation. Although it was journalistically called the “Malbec dollar”, in practice it will cover a large number of products of great importance to provincial producers. According to the estimate of the economist Fernando Marul, the differential dollar since April 1 only for the wine sector impacts exports for 1,000 million dollars, while the extension to “regional economies” – which will be done – is 5,000 million dollars.

The negotiation with the IMF includes a kind of “moving targets”, which will vary from quarter to quarter depending on the actual impact of the drought.

The figures handled by producers and consultants are dramatic. A study by Delphos Investment, for example, estimates that 10 billion USD of gross reserves will be lost. At this stage, it is already impossible to meet the required net reserves of 12,000 million dollars by the end of the year, whereas they currently amount to barely 4,500 million dollars and with forecasts on the decline.

The agreement with the IMF has two sides to read the markets. On the one hand, it reduces the stress that a default would have generated already in March, with the need to ask »waivers” and uncertainty about the agency’s future disbursements. But on the other hand, it exposes the extremely fragile situation of the Centrale, with very limited firepower on the foreign exchange front. All this as months of great uncertainty linked to the elections and the proximity of PASO are coming, in the second week of August.

In addition to the shortage of reserves, this week has also increased concern over poor fiscal figures, impacted by lower foreign trade volume and low collection through withholding taxes.

However, figures discussed between the IMF and government technicians concluded that it is possible to maintain the main red target. For the first quarter, at least, the numbers would line up to close with the red of 0.35% of GDP.

The scenario for the coming months is presented, beyond the path that Massa is trying to follow, extremely complex from a drought already considered “historic” at this stage. So much so that it would lead to a 35% drop in the soybean harvest.

The consequences will be a serious shortage of dollars, which will have to be compensated by an even more severe repression of imports. But in addition, collection will also suffer, with the consequent impact on the ability to increase spending in the midst of the electoral process. Finally, there will also be a strong impact on economic activity due to the drop in agricultural production: it is estimated that the drop in GDP for the year could be around 1.5%.

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