Argentina misses debt payment, decides to use grace period

BUENOS AIRES (Reuters):Argentina missed a bond interest payment of about US$500 million that was due on Wednesday and planned to use a 30-day grace period, the government said, as it seeks to avoid default and buy time to reach a wider debt revamp deal with creditors.

“The Republic has decided to use the grace period,” the Economy Ministry said in a statement, capping a day that saw bond prices fall and risk spreads widen in anticipation of the move.

Latin America’s No. 3 economy, hit hard by the coronavirus pandemic, is contending with a mountain of what it calls “unsustainable” debt. The government has proposed revamping US$ 65 billion in bonds. A restructuring proposal recently offered by the country expires on May 8, while the grace period for Wednesday’s missed payment ends on May 22.

The restructuring plan drew initial negative reviews from creditors, leaving the market wondering how the country will reach a deal.

“The government seems to have painted itself into a corner, and all over a US$ 500 million payment,” said Gabriel Zelpo, director of Buenos Aires economic consultancy Seido.

“It does not seems likely that they will resolve the restructuring within 30 days,” he said.

The country’s segment of JP Morgan’s Emerging Markets Bond Index Plus 11EMJ increased 240 basis points to 3,857 over safe-haven U.S. Treasury paper, indicating an increase in payment risk. Over-the-counter government bonds closed 2.2 percent weaker.

Both the government and its creditors have staked out tough opening positions as pressure builds to reach a debt restructuring deal.

“This is the offer, this is what they have to decide on,” Economy Minister Martin Guzman told local publication El Destape on Tuesday, saying creditors could take it or leave it. “The offer is what it is.”

The government wants to avoid the kind of chaotic default that the crisis-prone country experienced in 2002. That non-payment kicked off years of acrimonious litigation with creditors and an economic crisis that tossed millions of middle-class Argentines into poverty.

New bonds to be issued as part of the government’s proposed debt restructuring would contain “collective action clauses,” allowing Argentina to alter terms of the debt without the consent of all holders, according to a filing made to U.S. regulators.