Kicillof is studying issuing US$15 billion in debt to pay Repsol, Paris Club and holdouts
Tuesday, February 25, 2014
By Carlos Arbia—From the Economy Ministry
It’s one of the options that is being analyzed to definitively normalize the country’s financial situation before the end of 2014 and avoid taking debt on the international market. It will require amending the out-of-date Budget and then approval by the Congress.
It is important to note that when the Budget was approved for this year, the official dollar exchange rate was 4.20 pesos versus the current 8, with an average of 6.35 and an annual inflation rate supposed at 10.4%.
Also, in the Budget there was only a line item for a public debt payment of US$9.855 billion, for the so-called “Debt Reduction Fund”, created in 2010 to use BCRA reserves, but not for making other payments, like Repsol, Paris Club and the funds that didn’t enter the swaps on debt in default in case of a settlement. And there are doubts with regard to how they will be the almost US$4 billion for the GDP coupon that was set off for the 4.9% increase in 2013, which EMAE anticipated last week.
In recent days, Minister Axel Kicillof together with Finance Secretary Pablo López, Cabinet Chief Jorge Capitanich and Central Bank president Juan Carlos Fábrega, have admitted in meetings with bankers and businessmen that Argentina must normalize the financial horizon after having carried out the exchange rate adjustment and the cleaning up of the INDEC inflation rate to avoid greater losses in the international reserves.
Caring for the Central Bank reserves
In the case of Repsol, the government has decided that, if the Spanish firm accepts the US$5 billion payment plan, it will be done with 10-year bonds at an interest rate less than 10% annual. The government could use a remainder of some US$1.5 billion in Bonar 18 bonds that have not yet been placed on the market. But it will have to issue bonds for the equivalent of the remaining US$3.5 billion.
Regarding the Paris Club, whose adjusted debt is estimated at some US$9.6 billion, it will also try at making a payment with similar characteristics as the one to Repsol, without using BCRA reserves and with a similar haircut as was obtained from companies that had favorable sentences from the ICSID, the international arbitration commission within the World Bank.
The big question is what will happen with the holdouts now that at the end of this year the liabilities will reach some U$22 billion but the government is seeking a haircut of at least 50% and to also pay with 10 year bonds. But also, the authorities are hoping for getting fresh money that the banks in charge of the operation themselves will put at Argentina’s disposal.
Debt would increase in terms of GDP
In case this new process of taking debt comes together, starting with the payment to Repsol, Argentina will put an end to the virtuous mechanism of reducing liabilities, or debt reduction, which it began in May 2005 with the government of Néstor Kirchner with Swap I of the debt and then with Cristina Kirchner in October 2010 with Swap II and the payment in cash to the IMF for some US$9.5 billion in January 2006.
With those movements the ratio of public debt to GDP went from 150% in 2005 to 45% last year. But the novelty is that as a product of the exchange rate adjustment or the devaluation of the peso in January that ratio has been modified and will reach 50% of GDP today, which marks the point of inflexion in the policy of debt reduction.
Public finances in the red
This considering that the primary result of the Non-Financial Public Sector would achieve a light improvement in 2014, closing at around 22 billion pesos, or 0.5% of GDP, as such that the financial deficit which includes the debt interest payments will surpass 90 billion pesos.
One has to take into account that in the value of these figures the financial assistance of the BCRA and ANSeS will go back to playing an important role. With those contributions the primary deficit will come to represent 2.5% of GDP, while the financial red ink will escalate until reaching no less than 5% of GDP, according to data from the consulting firm Abeceb.com.
For that reason the total financing needs of the national public sector in an optimistic scenario would come to 105 billion pesos, implying some US$13.1 billion at a rate of 8 pesos to the dollar. But an unfavorable scenario where there are no corrections of rates and with wage increases exceeding 25%, the state’s financing needs could amount to 180 billion pesos, or a total of US$22.5 billion calculated at the official rate of exchange of 8 pesos.
The big question is if this amount will be covered with greater monetary emission or that the government will place debt on the international capital market, therefore the indebtedness of the public sector could increase more than necessary to avoid a sharp decline in international reserves of the BCRA.
Argentina will abandon its debt reduction policy to normalize its finances
While Finance Secretary Pablo López has recently said in the G-20 meeting in Sydney that “there is not growth if the debt burden is excessive, and, at the same time, the debt cannot be paid if there is no growth” and that “there will never be sustainable debt if the right is granted to privilege a minority of unscrupulous bondholders, at the expense of the great mass of creditors, what is clear is that Argentina is appearing to be ready to normalize its financial situation and change the model of debt reduction with social inclusion.
The litmus test will begin when it is finally known how the government will pay Repsol the value offered for the expropriation of its majority participation in YPF.
U.S. supports the negotiation with creditors
The charge d’affaires at the embassy in the country said that the government made encouraging decisions
Tuesday, February 25, 2014
The United States government yesterday expressed its support for the decisions taken by the government to resolve its debt in default and the conflict with Spain over the confiscation of Repsol, among other disputes. The Minister-Counsellor in charge of the Embassy of United States in Buenos Aires, Kevin Sullivan, said he considered the steps taken by the government in this matter to be very encouraging.
The diplomat spoke at the presentation of summer course of the United States Chair at the University of San Andrés organized together with the diplomatic office on the campus in the Buenos Aires locality of Victoria.
When asked his opinion on the effect of the negotiations initiated with Repsol over the confiscation of YPF and with the Paris Club to pay the debt in default since 2001, Sullivan’s message was blunt.
"We are very encouraged by some decisions that the government is making on resolving disputes it has had with private investors, as well as the financial responsibilities of the State with the Paris Club," said the diplomat, in charge of the diplomatic seat until there is new Ambassador.
Sullivan, who served at the diplomatic headquarters in Argentina during the period of 1997-2000, said: "We see that the solution of these disputes will help in several ways. The most important sense is in increasing the confidence of national and international investors to contribute to the growth and development of the country.” The second objective that would be achieved if these negotiations are successful would be "to remove the most controversial and problematic topics from the bilateral agenda to allow more space for the collaboration that we want to have.” State and Treasury Department officials often express in private their fatigue over not being able to overcome issues with Argentina that have been pending since the end of 2001.
In this sense, Sullivan said that "the government is making very positive decisions; much remains to be done yet, but there are reasons for hope.”
The United States maintains a softer stance than Germany and Japan in the negotiation with the Paris Club, as has happened in the past. In any case, there is still no agreement on the form of payment offered by Argentina (a cash advance and the rest in bonds), which has no precedent in history with this club which brings together the creditor countries.
On the question of Repsol, Washington had already expressed interest in ending the conflict between YPF and the Spanish oil company, due to the intention of some American oil companies to enter into business at Vaca Muerta, as has already been expressed by Chevron.
Also awaited, in the lawsuit with the vulture funds, is whether the U.S. Supreme Court will ask the Obama government to express its position, as it has done previously.
The Repsol agreement will cost up to US$1 billion more than the government announced
Tuesday, February 25, 2014
by Martín Rodríguez Yebra | LA NACION
MADRID.- Almost two years after throwing Repsol out of the country and nationalizing YPF, the government of Cristina Kirchner is preparing to celebrate an agreement that cost it more than expected: the final offer to compensate the Spanish oil company contemplates the delivery of a package of bonds for a nominal value that could be more than the US$5 billion agreed to in November.
The Casa Rosada will commit to issuing up to US$1 billion more if the market price of the bonds handed over fall from the originally established amount, something that will happen almost certainly because Argentine debt is currently trading with big discounts.
That clause is part of the extraordinary guarantees that the Spanish demanded for sealing the deal, that will be submitted today to a vote of the company’s administrative council and that, once formalized, it will be announced in Buenos Aires by the Economy Ministry.
Repsol aspires to monetizing the bonds in the short term to bring an amount as close to US$5 billion as possible into its coffers which Argentina acknowledged as debt for having expropriated 51% of YPF. That is the amount that was noted last week on its 2013 balance sheet (which implied acknowledging losses, since the value of the books is around US$7 billion).
According to sources aware of the efforts, the "real value" will be established in accordance with the average quote on Argentine bonds in the three months prior to the final signing of the contract. The effective minimum amount that Repsol will accept collecting is US $4.7 billion.
When the signatures dry, it will close one of the most serious trade conflicts faced by the country in recent years; a crisis which brought the relationship with Spain to a point of maximum tension, and which hindered the search for foreign investment for the mega-deposit of non-conventional hydrocarbons from Vaca Muerta.
The contract that was negotiated over the past three months by the Argentine government and the leadership of the company describes a complex financial fabric, with bonds of different characteristics. A portion of the payment will be done through the expansion of bonds in circulation (with the nearest maturities) and another (on the order of U$3 billion) will be a new issuance, denominated in US dollars and with 8.5% annual yield, according to what business sources told LA NACION. It will total US$5 billion. But the government will commit itself to other debt issues of up to 20% more to offset the depreciation suffered by Argentine sovereign bonds. The debt will be considered paid only when the money enters the coffers of the company (either from the sale of the securities or its amortization).
Bonds would be issued for the most part under Argentine legislation to avoid the possibility of an attachment, at a time when the decision in U.S. court on the litigation between the country and the so-called vultures funds on the debt in default remains pending.
As the company demanded, there will be no obstacles to liquidating the bonds, partially or entirely. Antonio Brufau, Chairman of Repsol, told people close to him that the plan is to close a transaction with a bank to monetize the compensation as soon as possible.
The increase in the nominal value and the removal of obstacles for the bonds to trade in the market were the keys to reaching the agreement. The Argentine government became more permeable after the big devaluation in January, when the world began to wonder if the Argentine economy was headed towards another disaster.
The Casa Rosada wants to show the agreement with Repsol as a first sign of normalization of its international economic relations, while it is negotiating the possibility of paying the debt in default with the Paris Club, litigating in United States against the holdouts and taking measures that have long been demanded by the International Monetary Fund (IMF), like the cleaning up of the inflation rate.
Brufau and the rest of the board of the oil company today will discuss the contract that emerged from the negotiations. If it is approved, as it is assumed in the financial world of Spain that it will be, an extraordinary meeting of shareholders will be convened in March. In the meantime, the Argentine Congress must approve the additional debt.
At the end of the road, Repsol will end all its international lawsuits against Argentina, including one before the arbitral tribunal of the World Bank (ICSID), where it demanded US$10.5 billion for its nationalized YPF shares.