Credit ratings agency Moody’s reported that Argentina’s US$1 billion sovereign debt buyback announced last week constitutes “a default under our definition”.
The agency called the buyback, which mainly involves two dollar-denominated bonds that mature in 2029 and 2030, a “distressed exchange,” which qualifies as a default according to their criteria.
As per Moody’s definition, a “distressed exchange” happens when a debt issuer makes a new offer to creditors that amounts to a diminished value compared with the original promise, with the effect of allowing the issuer “to avoid a likely default.” Argentina’s maneuver, which Moody’s said consisted of retiring debt “at a discount before it begins to amortize at par,” would meet that description.
According to Moody’s, the operation, which started last Wednesday with a US$300 million purchase, is unlikely to boost investor sentiment as the government intended.
Moreover, the agency stated that the government has yet to specify how much of the US$1 billion will be allocated to the purchases of each bond and the target date of when the buyback process will cease.
Moody’s claimed that the buyback “has supported an increase in the price of both bonds,” which are being bought back at distressed levels and will save the country money in the small and medium term, especially “on the principal that will begin amortizing in 2024.” However, the agency highlighted that the operation will not help to support the government’s repayment capacity beyond that year.
According to the report, the buyback is far from enough for Argentina to regain market access before the bond’s principal repayments and therefore will not help to “avoid another credit event” like “restructuring, a distressed exchange or a payment default”. They added that the operation, also intended to “improve the debt’s repayment profile”, comes “at the cost of scarce foreign currency that is pressuring the country’s external finances.”
In this vein, Moody’s said that by January 2025, Argentina’s sovereign debt will greatly increase its funding needs and pressure the country’s “already tight external finances.”
The agency noted that the government claimed the US$1 billion will come from funds initially intended for gas imports, but contested its use for a debt buyback in a context of scarce external liquidity. In that regard, they mentioned the estimated “decreased foreign exchange inflows” for 2023 due to a drought.
“Reserve accumulation remains a challenge as a result of weaker exports that have led to the introduction of further exchange restrictions and multiple exchange rates that are exacerbating distortions in the economy,” they added.