Economy

Argentina Inc fear 'virtual default' as FX noose tightened

The recent Central Bank's move pressured firms to restructure their debts and tightened individuals' access to greenbacks

Argentine pesos. Picture taken August 30, 2018. Photo: Reuters/Marcos Brindicci/File Photo
  • The measures mean companies with debt payments greater than $1 million per month between mid-October and the end of March next year can only cover 40% of that in foreign currency, in effect forcing them to refinance the remainder;
  • Moody’s in a report said the measures negatively impacted the ability of local firms to pay back the debt on time.

Argentina Inc are facing an increasingly difficult task to keep up with payments on dollar debt, hiking the risk of a wave of corporate defaults after the country tightened access to foreign currency to stem a sharp decline in reserves.

The central bank move, which pressured firms to restructure their debts and tightened individuals’ access to greenbacks, jolted local markets, pummeled bond prices and equities, and heightened demand for black market dollars.

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The measures mean companies with debt payments greater than $1 million per month between mid-October and the end of March next year can only cover 40% of that in foreign currency, in effect forcing them to refinance the remainder.

“The source of financing is running out. We are talking about companies whose cash flows are local and cannot acquire foreign currency. It is crazy,” said Mariano Sardáns, director of Argentine asset manager FDI International.

“This is a death warrant for many firms, or even directly means default for these companies. They run out of financing, they are out of the game.”

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Moody‘s in a report said the measures negatively impacted the ability of local firms to pay back the debt on time. It said there were $1.253 billion in capital repayments on “negotiable obligations” debt instruments due in the October-March period.

“In this context, we see Argentinian companies taking defensive positions, significantly reducing their expansion plans and reviewing their cost structures,” the agency said.

Argentina Inc was already facing a tough future. The economy is emerging from a sovereign default and is set to contract around 12% this year, which would mark its third straight year of recession.

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The economy plunged a record 19.1% in the second quarter of the year and unemployment has spiked to a 16-year high. Reserves have dwindled, while the additional foreign currency controls have hammered investor confidence.

The rules also led to commercial banks halting sales of dollars to savers as they adapted to the new system. Argentines could already only buy a maximum $200 per month. The central bank has moved to reassure savers over access to dollars.

With the new rules, firms would still have the option of buying dollars in informal markets, but dollars there are around 80% more expensive than the official rate due to high demand.

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