Sovereign debt restructuring grows up
Why it matters: Both countries are repeat players at this game, and it would be very easy for 2020 to resemble previous acrimonious fights. Wonderfully, however, it looks like that's not going to happen this time around.
The backdrop: I've long had something of an obsession with sovereign debt restructuring, where countries default on their creditors and replace their bonds with new instruments that generally carry concessionary interest rates. I love the larger-than-life characters, the high dudgeon on all sides, and even the glorious vocabulary of it — champerty and pari passu and contumaciousness.
- By rights, then, I should be deeply immersed in the recondite details of the latest debt negotiations in Argentina and Ecuador. What kind of mischief is Argentina getting up to with its collective action clauses? Will Ecuador's finance minister manage to pull off a deal before getting impeached?
- The catch: This time, such details don't really matter. The bondholders are mature long-term investors rather than avaricious vulture funds, and they're keeping their eye on the bigger prize, which is the continued health of the asset class more broadly.
Emerging market sovereign debt is trading near its all-time highs, after a nasty downward lurch in March. To look at it, you'd think there was no longer any financial distress at all.
The big picture: Now is a surprisingly good time for Argentina and Ecuador to restructure their debts, for three reasons.
- The case for a restructuring is crystal clear. Unable to print the hard currency they need to service their debts and pay for much-needed medical and other imports, emerging markets around the world are spiraling into a global recession they simply can't afford. The creditor community understands this. If shareholders of S&P 500 companies aren't worried about this year's earnings, then sovereign bondholders shouldn't care too much about the next few coupon payments.
- Thanks to swift action by the IMF and global central banks, sovereign bonds are trading at very healthy levels. If bondholders come to a deal, the new bonds they end up with will trade at low yields and be worth a lot more than any kind of paper in default.
- More defaults are coming, and a pair of constructive early precedents in Argentina and Ecuador will be very helpful in terms of providing guidelines for working out the debts of other countries. Bondholders will "get a deal done, set the right precedents, negotiate as a group and stand together, because there's more of this stuff coming," one bond-restructuring veteran tells me. "Starting on a bad path would not make sense."
The bottom line: Comity and cooperation are rarely hallmarks of sovereign debt restructuring. But the coronavirus seems to have conjured them onto center stage.