Political Climate Report
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CONTACT INFORMATION POLITICAL & REGULATORY RISKS [email protected] Heidi Lough www.cefeidas.com [email protected] Madeleine Elder +1.646.233.3204 (USA) [email protected] +54.11.4807.6807 (ARG) Juan Cruz Díaz Cabello 3791- PB “B” [email protected] Ciudad Autónoma de Buenos Aires (C1425APO) CLIMATEREPORT República Argentina Political Climate Report - ARGENTINA March 9, 2016 POLITICAL IN THIS ISSUE In February, Mauricio Macri’s new government took further steps to address two of Argentina’s main short-term economic Page 2 challenges: reducing federal spending, and resolving the protracted holdouts dispute to regain access to international Argentina reaches preliminary capital markets. Correcting these imbalances will be crucial to agreement with holdout creditors avoid further deterioration of macroeconomic conditions. Peso depreciates further despite Curbing inflation represents a further key challenge, although Central Bank intervention the government has had little success on this front so far. The international community has generally come out in strong Page 3 favor of the Macri administration’s policy agenda. Amid rising Macri courts opposition elements expectations, however, significant challenges remain. Page 4 Edging towards economic normalization Provisional agreement reached over changes to federal co-participation After several weeks of speculation, the new administration system publicly stated its decision to adopt a ‘gradualist’ approach to Government negotiates salary reducing Argentina’s fiscal deficit. As discussed in our previous increases with labor unions PCR, measures to curb federal spending have so far included Page 5 the reduction of subsidies on public utilities (mainly electricity) and the suspension of contracts for around 80,000 public Argentina moves closer to US, sector workers. Through the measures already introduced, as Europe well as those to be implemented in the near future – such as Page 6 the reduction of natural gas subsidies – the government expects to reduce the fiscal deficit from 6-7 percent of GDP YPF Chief Galuccio resigns (the real magnitude is uncertain) to 4.8 percent by the end of Page 7 the year. It remains to be seen how a proposed modification to income tax policy will affect total spending. So far, these Holdouts dispute – key milestones measures, while unpopular, have not provoked widespread social opposition. The decision not to finance the fiscal gap through an aggressive austerity program put extra pressure on the government to reach a swift resolution of the holdouts dispute. As such, the Macri administration made a generous offer to the bondholders in late February (see below). Having rejected the option of further monetizing the deficit, returning to international finance markets is the only way for the government’s gradualist economic strategy to work. Find more about our services Follow @CefeidasGroup Badlar* Interest Rates since Macri took office Peso depreciates further despite Central Bank intervention ARGENTINA 33 - 31 One of the first monetary policy measures PCR the Macri administration passed was the 29 lifting of foreign exchange controls on the US 27 dollar, or ‘cepo’ (‘clamp’) (see our previous PCR for further information). Initially, the 25 rate experienced minor fluctuations, but 23 remained relatively stable. Towards the end of February, the peso began to depreciate 21 further against the dollar. The Central Bank intervened in the foreign exchange market to stabilize the rate six times between February 4 Jan 16 Jan 4 16 Jan 7 2 Feb 16 Feb 2 16 Feb 5 4 Mar 16 Mar 4 1 Mar 16 Mar 1 24 and March 3. Until this point, the peso had 12 Jan 16 Jan 12 16 Jan 15 16 Jan 20 16 Jan 25 16 Jan 28 12 Feb 16 Feb 12 16 Feb 17 16 Feb 22 16 Feb 25 15 Dec 15 Dec 15 18 Dec 15 Dec 18 15 Dec 23 15 Dec 29 10 Dec 15 Dec 10 been allowed to float freely. In a further bid to prevent the peso from surpassing the Source: BCRA government’s unofficial ‘ceiling’ of 16 to the dollar, the Bank hiked interest rates to 37 *The Badlar rate is a wholesale rate, an average of the interest rates for deposits of over ARS 1 million with a percent (up from 31.15 percent) on March 2. maturity of 30-35 days offered by commercial banks. The same day, it also sold almost USD 500 million to stabilize the currency. As of March 9, the rate had settled at 15.06 Argentina reaches preliminary pesos to the dollar. The currency lost 12.2 percent of its value in February, and at the agreement with holdout creditors end of the month, foreign exchange reserves were down by approximately USD 1.5 billion, On February 29, US Court-appointed from USD 30.1 billion to USD 28.6 billion. It mediator Daniel Pollack announced that the is likely the peso will continue to be four largest and most intransigent holdout considered weak while high inflation persists. creditors had signed an “Agreement in Principle” with the Argentine government. Together, these creditors hold approximately 65 percent of Argentina’s percent of the country’s disputed debt. The defaulted sovereign bonds. If the new government’s willingness to settle is in agreement is approved by Congress, sharp contrast to the previous Argentina will pay USD 4.65 billion to the administration’s ‘no-pay’ stance (for a hedge funds, which include Elliot timeline of the holdouts dispute, see page Management, Aurelius Capital 7). Management, Davidson Kempner and Bracebridge Capital. This figure represents The agreement is contingent on several a 25 percent haircut on the funds’ original factors. First, the Argentine Congress must demands, and excludes a payment to settle repeal two laws: the 2005 Lock Law (‘Ley claims outside the Southern District of New Cerrajo’) and the 2014 Sovereign Payment York, as well as certain legal fees and Law (‘Ley de Pago Soberano’). The former expenses incurred over the protracted blocks Argentina from offering a more dispute. Reaching a settlement with this favorable deal to the main bondholders group, led by NML Capital (a subsidiary of than to the ‘me-too’ bondholders, while the Elliot Management), represents a good latter allows the country to make payments outcome for the holdouts, who are likely to to bondholders without having to clear receive a 341 percent return on what they payments through the US. If Congress originally paid for the bonds. Argentina has approves the repealing of this legislation, now reached resolution with holders of 85 the payment to the four main bondholders 2 must be made in full by April 14, although Macri courts opposition elements this date may be jointly reviewed by the government and the holdout creditors. ARGENTINA Gaining approval of the legislative - measures needed to resolve the holdouts Since Pollack’s announcement of the dispute is the Macri administration’s first PCR bondholder deal, Finance Minister Alfonso major challenge in Congress. During Prat-Gay has announced Argentina will lawmakers’ summer recess, the emit USD 15 billion worth of bonds to cover government made certain decisions that all its financing needs, and that the funds alienated the opposition. The nomination of for this are already “in place”. USD 11.7 two justices for the Supreme Court without billion of these bonds will be issued to cover the Senate’s approval, and the unilateral the country’s debt. Finance Secretary Luis decision to increase tax co-participation for Caputo has stated that he expects the the City of Buenos Aires only did little to international lenders will demand a 7 help the government build congressional percent annual payment rate for the loans support. Despite these political errors, we Argentina will receive. expect the government will be able to garner the support needed in Congress to On March 2, US District Judge Thomas repeal the debt laws and approve the Griesa announced he will lift the injunction settlement with the creditors. This is due to known as the ‘stay’, in place since the government’s recent political 2014.This stay has blocked Argentina from maneuvering with opposition members paying other bondholders until it had (see below for further analysis), and the settled with the group of holdouts led by Frente para la Victoria (FPV) alliance NML Capital. The injunction will only be recently having lost the support of 17 of its lifted if Argentina and the main Lower House bloc members. As a bondholders meet the conditions imposed consequence, Cambiemos is – for now – by Griesa (see above). The ruling will be the largest congressional bloc in the Lower delayed until mid-March to allow time for House. appeals, although since Argentina now has the support of multiple bondholders, After the rupture in the Peronist Party in plaintiffs will find it difficult to reverse early February, there are now four Griesa’s decision. Peronist-led blocs in the Lower House (see graphic, below). These blocs are the FPV The Lower House’s Finance and Budget (down from 95 seats to 82), Sergio Massa’s committees have approved an amended Unidos por una Nueva Alternativa (37 settlement bill for debate in the coming seats), the breakaway Justicialist Party days. The alterations, put forward by members (around 17) and the non-aligned opposition parties, included the placing of (some of whom have already joined the limitations on the debt to be issued by the new splinter). In spite of the recent government, and on certain banking and defections, FPV remains the second largest legal fees. If Congress approves the voting bloc in the Chamber of Deputies. legislation, the country will exit default and Cambiemos now has 89 deputies. return to the global bond market as early However, the alliance remains much as later this month. With the ability to weaker in the Senate, where the Peronist borrow internationally, Argentina will be Party is well-represented.