Daily Times

As serial defaulters Argentina and Ecuador near the finishing line on their latest sovereign debt overhauls, foreign creditors are nervy about investing again without macroeconomic reforms and International Monetary Fund support.

On the surface, the prospects for both countries look brighter. Absent complicated negotiations with the IMF, a clean slate post-debt restructuring will allow them to focus on reviving their COVID-19-ravaged economies with much less concern about looming foreign debts to repay.

But both governments will be painfully aware they need to woo back investor support to ensure their path to recovery – not an easy challenge given their tarnished track-records that combine for about 20 defaults.

Argentina’s government hopes to wrap up its latest $65 billion debt restructuring by end-August. Ecuador, having gained support for its plan relatively quickly, is also finalising its $17.4 billion foreign debt revamp.

“In of itself, these deals are a positive first step but there is a lot more work to be done to firm up the outlook for investment,” said Graham Stock, an emerging markets strategist at BlueBay Asset Management, and a creditor to both countries.

“There’s plenty of goodwill (from creditors) but there’s a question of (government) actions rather than just good intentions.”

Most immediately focus will turn to engagement with the IMF.

Ecuador’s deal was predicated on a fresh agreement with the IMF, giving many investors faith in the commitment of President Lenin Moreno’s administration to revamp the stalled $4.2 billion IMF lending programme.

Argentina’s talks may be trickier. Economy Minister Martin Guzman has warned of “tough” negotiations that may not lead to a deal on a new program until early 2021.

“It’s going to be a very difficult discussion,” said Mauro Roca, emerging markets sovereign research managing director at TCW.

“The IMF will ask for some policy conditionality and Argentina at this point doesn’t seem willing to accept important changes in the direction of policy. That would be seen as interventionist, so that discussion is going to be difficult and it’s going to take a while.”

Ecuador’s sovereign bonds have generally outperformed Argentina’s since May, which analysts said partly reflected Quito’s friendlier talks with creditors.

POLITICAL WILL

Hopes of generating economic revival while ensuring debt sustainability – expected to stabilise at about 100% of GDP in Argentina’s case – hinges on politics.

“It’s going to depend on the macroeconomic conditions and the policy regime, particularly the direction of economic policy,” TCW’s Roca said. “If those policies are not considered to be sustainable nobody would put money to work, particularly in FDI or something that requires looking down the road.”