The Lens is a weekly newsletter published by FrontierView’s Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Our teams of analysts are conducting research into the potential impacts of the novel coronavirus (COVID-19) on the global economy and business environment. Subscribe today to receive the latest insights on COVID-19 business impacts in your inbox every Thursday. Read an excerpt from this week’s edition of The Lens focused on debt restructuring in Argentina as you prepare your business for coming changes.

Argentina reaches a debt restructuring deal to exit default
Key Takeaways
  • After a whirlwind series of events, Argentina’s government announced that the country’s three biggest bondholder groups agreed upon one last restructuring offer on August 3. The bond swap will likely take place on September 4.
  • The content of the restructuring was very similar to government’s offer from July 5, which we have lauded as a significant improvement from the original April proposal. The only major revision yesterday was moving forward the calendar dates of the annual coupon payments.
  • The timing of the contract was in line with our base case assumptions, meaning that we do not plan on revising our economic forecasts exclusively as a result of the deal.
  • Next steps for the government now include resuming negotiations with the IMF, addressing deep macroeconomic imbalances (e.g., inflation and the breach between the official and unofficial exchange rates) and formulating a plan to lift the country out of the COVID-19 crisis.
Our View

Restructuring external debt certainly does not solve all of Argentina’s problems, but it is a great first step to untangling the myriad of economic and social imbalances that afflict the country. The primary reason why reaching a deal was so important was because a prolonged default would have locked the sovereign and local corporations out of international credit markets for an indefinite period. Absent access to credit, the Central Bank of Argentina (BCRA) has printed money to finance COVID-19-related relief spending. In our view, the BCRA will gradually dial down the monetary base expansion, nearly eliminating the risk of hyperinflation in 2021. Firms should expect accelerated depreciation of the official exchange rate now that the risk of capital flight associated with failed negotiations has faded.

Business Implications

In addition to peso depreciation and the lower risk of runaway inflation, businesses operating in Argentina should expect the government to start sending clear signals about the post-pandemic recovery plan. Firms should instruct their government relations teams to evaluate the administration’s policy priorities and insist that your company’s interests are represented in any formal recovery effort. It will also be important to reset your scenario assumptions going forward and to put a greater emphasis on the IMF negotiations and FX/inflation dynamics.

Alex Schober, Senior Analyst for the Southern Cone