GIC – Drexel University Conference “Sovereign Debt Restructurings: Prospects and Challenges in Argentina”, 28 February 2020
Argentina Debt Restructurings Elena Duggar, Chair of Moody’s Macroeconomic Board, Associate Managing Director, Credit Strategy and Standards
February 2020
Key Messages
1
Argentina’s government bond rating is Caa2, RUR in the midst of a series of short term debt defaults and a restructuring of medium and long term debt
2
The historical track record of large sovereign debt restructurings suggests a cautious stance on potential recoveries
3
Credit challenges include the large share of foreign currency debt amid limited domestic funding options, and restarting the economy in a challenging global external environment
Argentina Debt Restructurings, February 2020
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Argentina’s government bond rating has been Caa2 since August 2019, currently under RUR » The review for downgrade reflects our view that there is a significant risk of higher losses expected from future negotiations between the government and debt holders
» We could confirm the current rating if the expected terms for the debt restructuring limit investors' losses to around 10%-20% » We would downgrade the rating if we were to conclude that expected losses to investors will likely be higher than 20% Ratings
Foreign Currency
Local Currency
Gov. Bond Rating
Caa2/Ratings Under Review
Caa2/Ratings Under Review
Country Ceiling
Caa1
B2
Bank Deposit Ceiling
Caa1
B2
Source: Moody’s Investors Service
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In default, Moody’s positions ratings to reflect expected recoveries Moody’s ratings refer to the probability of default and loss given default
Approximate expected recoveries associated with ratings for defaulted or impaired securities
Source: Moody’s Rating Symbols & Definitions, January 2020
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Moody’s sovereign bond rating methodology incorporates four key credit factors Factor 1: Economic strength • Growth dynamics • Growth • Volatility • Scale of the economy • Nominal GDP • National income • PPP GDP per capita • Adjustments • Other
Factor 2: Institutional and governance strength • Quality of institutions • Quality of legislative and executive institutions • Strength of civil society and the judiciary • Policy effectiveness • Fiscal policy effectiveness • Monetary and macroeconomic policy effectiveness • Adjustments • Government default history and track record of arrears • Other
Factor 3: Fiscal strength
Factor 4: Susceptibility to event risk
• Debt burden • Debt to GDP • Debt to revenue
• Political risk • Domestic political and geopolitical risk
• Debt affordability • Interest payments to revenue • Interest payments to GDP
• Government liquidity risk • Ease of access to funding
• Adjustments • Debt trend • Share of foreign currency debt • Contingent liabilities • Sovereign wealth funds
• Banking sector risk • Risk of banking sector credit event • Total domestic bank assets • External vulnerability risk • Adjustments
Source: Moody’s Sovereign Bond Ratings Methodology, November 2019
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Argentina’s default timeline Aug. 2019
Post-primary election outcome led to a severe market reaction which in turn raised the government's debt load, lowered debt affordability, and reduced funding sources
On August 28, the government delayed repayment on over $8 billion of short-term debt and signaled its intent also to restructure portions of Argentina's medium and long term debt
Sep. 2019
On September 1, the central bank announced a suite of capital controls meant to ease negative pressure on the exchange rate and stem the outflow of reserves
Dec. 2019
The government postponed payments on short-term LETES (part of the ST debt restructured in August) of about $9 billion in December 2019
Jan. 2020
The government offered holders of LECAPS (ST peso debt that was also part of the ST debt restructured last August) to exchange their bonds for new ST debt of 240 and 355 days in maturity
Feb. 2020
Argentina postponed a $1.47 billion principal payment on the country’s AF20 bond until September 30
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Recent developments
January
February
Argentina’s government submitted a “debt sustainability” bill to Congress, aimed at creating a legal framework to improve debt terms, interest charges and amounts of capital
Province of Buenos Aires avoided a default on its notes due 2021 by making the principal and interest payment within the allowable grace period, but a future broader restructuring of foreign currency debt will likely lead to bondholder losses
February
Argentina postponed a $1.47 billion principal payment on the country’s AF20 bond until September 30
February
Argentina agreed to start consultations with the International Monetary Fund (IMF) that could lead to a new financing program, days after the IMF assessed Argentina’s debt to be unsustainable
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Heavy upcoming maturities against limited reserves About $20.5 billion and 28.5 billion peso upcoming bond payments in 2020 2020 debt service payments (USD billions, as of December 31, 2019) Principal payments USD
Peso
Maturity schedule for Argentina (USD billions, as of December 31, 2019) Peso Multilateral USD (Letes) USD (medium and long-term)
Interest payments Multilateral
$10
USD
Peso
Multilateral $50
$2.5
$9
$45
$8
$2.0
$40
$7
$35
$6
$1.5
$30
$5 $25 $4
$1.0 $20
$3 $2
$15
$0.5
$10
$1
$5
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20
$0.0
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20
$0
$0 2020
2021
2022
2023
2024
2025
Source: Moody’s Investors Service
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Putting Argentina’s debt numbers in perspective » Argentina’s general government debt totals about $340 billion, or 84 percent of GDP as of end-2019 » Potentially $60+ billion of private sector debt could be restructured » About 80% of government debt is in or indexed to foreign currency Historical sovereign bond default amounts (Total defaulted bond debt, $ billion) 300 261.5 250 200 150
100
82.3
72.7
65.2 42.1
50
29.4 13.3
9.1
7.9
6.6
0 Greece
Argentina
Russia
Venezuela
Greece
Argentina
Ukraine
Jamaica
Jamaica
Ecuador
(Mar. 2012)
(Nov. 2001)
(Aug. 1998)
(Nov. 2017)
(Dec. 2012)
(Jul. 2014)
(Oct. 2015)
(Feb. 2013)
(Feb. 2010)
(Aug. 1999)
Note: Bracket refers to the date of first default. For Venezuela, the combined amount of sovereign and PDVSA bonds outstanding are shown here, and they are the amounts on which the sovereign may ultimately start a debt restructuring. Source: Moody’s Investors Service
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Large sovereign defaults have low recovery rates There is usually a high level of uncertainty around expected losses Âť The average historical issuer-weighted sovereign loss rate was 45% over 1983-2018. The value-weighted loss rate was 70% because of the large Argentinean (73%), Russian (82%), and Greek (76%) defaults that garnered high loss rates Loss rates varied widely in the largest sovereign defaults (Loss rate, % of par) 90 80 70 60 50 40 30 20 10 0 Russia
Greece
Argentina
Greece
Ecuador
Ukraine
Jamaica
Jamaica
(Aug. 1998)
(Mar. 2012)
(Nov. 2001)
(Dec. 2012)
(Aug. 1999)
(Oct. 2015)
(Feb. 2013)
(Feb. 2010)
Note: Loss rate is defined as 100 minus the average trading price (in % of PAR), 30-day post default or around closing date of distressed exchange. Source: Moody’s Investors Service
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Market re-access and credit standing remain impaired for several years after debt distress Market exclusion is highly correlated with the haircuts imposed on investors (Sovereign bond defaults, 1998-2018)
» On average, sovereign governments remained out of international capital markets for 5.8 years after default and 5.2 years after final default resolution
» Default resolution was relatively quick, taking slightly more than one year on average, meaning length of market exclusion generally not driven by inability to resolve default but by length of time it took for country to rebuild ability and reputation to service debt Source: Moody’s Investors Service, Sovereign Defaults Series: Market Re-Access and Credit Standing After Sovereign Default, October 2013
Russia* 80
Greece* Ecuador (2008)
70
Trading price-implied loss (%)
» Length of market exclusion is highly correlated with the loss imposed on investors during the debt restructuring
90 Cote d'Ivoire (2000) Argentina (2001)
Grenada 60 Ecuador (1999) 50 Cyprus 40 30
Pakistan
Dominica
Uruguay Argentina (2014)
Grenada Ukraine
Cote d'Ivoire (2011) Jamaica (2013) Jamaica (2010) 10 Paraguay Dominican Rep. 0 0 5 10 Time from default to re-access (years) 20
15
* Russia issued first international bond 12 years after the 1998 default, but could have reaccessed earlier. For Greece, return to full market access is noted as of Jan 2019, but there were some earlier placements.
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Argentina has a significant exposure to foreign currency debt amid limited domestic funding options A high and increasingly costly debt burden (%)
100
Gen. Gov. Local Currency Debt/GDP Gen. Gov. Foreign Currency & FC-Indexed Debt/GDP
The economy has significantly dollarized
70
Real Eff. Exchange Rate - RHS (% change) "Dollarization" Vulnerability Indicator Banking system assets/GDP (%)
30
90 60
20
50
10
40
0
30
-10
20
-20
10
-30
0
-40
80 70
60 50 40 30 20 10 0
Note: “Dollarization” Vulnerability Indicator = total foreign currency deposits in the domestic banking system / (official foreign exchange reserves + foreign assets of domestic banks). Source: Moody’s Investors Service
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Argentina’s economy will remain in a multi-year recession through 2020 Real GDP (index, t-5=100) Default
Argentina - 2019
Venezuela - 2017
Greece - 2012
Argentina - 2014
Ukraine - 2015
Argentina - 2001
140
120
100
80
60
40
20 t-5
t-4
t-3
t-2
t-1
t
t+1
t+2
t+3
t+4
t+5
Note: t refers to the time of sovereign default Source: Moody’s Investors Service
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Latin America remains a growth laggard compared with other regions 2010-13
2014-16
2017-19 6.9
7.0
Average GDP growth (%)
6.0 4.8 4.8
5.0
4.0 3.0
5.0
4.8 3.9
3.5 2.9 3.0
2.9
2.5 1.9 2.0 2.1
2.0
1.8
1.6 1.6
1.5
1.7 0.9
1.0 0.0
-0.3 -1.0 G-20 All
G-20 Advanced G-20 Advanced G-20 Emerging ex US
G20 EMs ex China
EMs EMEA
EMs LatAm
Note: G-20 EMs LatAm includes Argentina, Brazil and Mexico. Source: Moody’s Investors Service
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The external environment will be challenging Six themes will shape global credit in 2020
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Elena Duggar Chair of Moody’s Macroeconomic Board Associate Managing Director Credit Strategy and Standards Elena.Duggar@moodys.com
moodys.com
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