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Amidst acute pressure on energy-oriented emerging market
economies and against the background of deeper economic recession
stemming from COVID-19, Ecuador has announced its intention to
defer interest payments. This week, Argentina and the IMF both
renewed their push for private sector write-downs on Argentine
debt, and African states are pushing for temporary debt relief.
This aligns positively with IMF and World Bank calls for immediate
relief on the official debt of poorer countries.
Ecuador
On 23 March, Ecuador's EMBI+ spread surged by 2415 basis points
to 6063 basis points. The trigger was a statement by the Minister
of Finance Richard Martínez that Ecuador planned to defer some
USD200 million of interest payments on its 2022 and 2030 bonds due
this week, although it paid USD324 million of principal on 24
March.
Martínez stated that the funds retained will be used towards
containing COVID-19. He stated that Ecuador will "begin dialogue
with commercial, bilateral and multilateral creditors", with the
goal of reaching "a good, sensible arrangement".
Ecuador has sought IMF help through a Rapid Financing Instrument
(RFI) to address "urgent balance of payments needs" and support
critical sectors such as healthcare. The IMF's Managing Director
Kristalina Georgieva stated that the IMF was "working
expeditiously" to address the request. She also stated that the IMF
was working on a successor facility to Ecuador's current Extended
Fund Facility, "to provide immediate support" to help Ecuador face
the impacts of COVID-19 on economic conditions while continuing to
back "the authorities' unwavering commitment to implement
much-needed economic and structural reforms".
Subsequently, on 24 March, President Lenín Moreno stated that
the IMF would grant Ecuador USD2.5 billion of RFI support to
address its COVID-19 related health crisis.
Argentina
On 23 March, Argentina's EMBI+ spread widened 347 basis points
to 4362 basis points, amidst concerns that COVID-19 driven economic
slowdown would push it towards hard default.
On 20 March, Argentine Finance Minister Martín Guzmán stated
that Argentina is "in the midst of a major economic crisis", while
reiterating the country's desire to proceed with debt
restructuring. Argentina claims it cannot service its foreign
currency liabilities for at least the next four years, with
Argentine sources claiming that the IMF - which previously has
suggested the need for haircuts on its public debt - shares its
perspectives.
This view was reinforced this week. On 20 March the IMF
published a technical note reiterating that Argentina's public debt
stock of close to 90% of GDP at end-2019 is "unsustainable". The
note stated it would not be "economically or politically feasible"
to reduce this sufficiently through running primary surpluses.
Instead, the technical document calls for a "decisive debt
operation, with a meaningful contribution from private creditors".
The analysis states clearly that there is "virtually no scope" for
debt service payments "to private creditors over the near to medium
term".
Additionally, Kristalina Georgieva, Managing Director of the
IMF, issued a parallel statement stating that "substantial debt
relief from Argentina's private creditors will be needed to restore
debt sustainability" and calling for "a collaborative process of
engagement between Argentina and its private creditors".
Even official debt faces non-payment: in a radio interview on
Radio Rivadavia, Argentine President Alberto Fernández announced he
had "told the IMF that in the next five years we cannot pay them a
peso", highlighting that with COVID-19 "I have a thousand more
reasons" to delay debt service.
Africa
A recent release by UNECA (UN Economic Commission for Africa)
states that the region will require emergency assistance estimated
at USD100 billion during 2020. African governments are also
planning to request from the G20 the waiver of interest rate
payments on public debt and sovereign bonds, estimated at USD44
billion, falling due in 2020 to free resources for COVID19.
Official debt relief initiatives
On 25 March, the World Bank Group and International Monetary
Fund issued a joint statement warning of the "severe economic and
social consequences" of COVID-19 on International Development
Association countries, the world's poorest states and home to a
quarter of the world population.
The two bodies called on "all official bilateral creditors" to
suspend debt payments from IDA countries "with immediate effect" to
assist them fund COVID-19 related measures and permit adequate
assessment of their needs.
It further asked G20 leaders to mandate the two bodies to
identify countries with "unsustainable debt positions" and prepare
proposals for "comprehensive action" by official lenders for "both
the financing and debt relief needs of IDA countries": it sought
approval for this at the G20 meetings on 16-17 April.
High grade debt
Market activity has been encouraged by the Federal Reserve
offering to make unlimited purchases of US Treasury Bonds and
extending its support to corporate debt and ETF corporate bond
funds, combined with passage of extraordinary US fiscal measures.
European markets similarly have been helped by ECB quantitative
easing and fiscal moves, not least in Germany.
The consistent theme this week has been of large-scale supply in
high-grade markets, with companies paying up to obtain this. In the
week to 20 March, some USD60 billion of investment grade corporate
debt was sold in the US. However, this came at a heavy price: The
Financial Times noted that the average yield on investment grade
corporate debt has risen from the 2020 low of 2.26% in early March
to around 4.5%, according to Ice Data Services.
On 23 March sentiment was further boosted by the Federal
Reserve's decision to extend its purchases. Bond supply remained
active with seven US high-grade deals worth almost USD20 billion,
including transactions by Wells Fargo, with USD6 billion in a
two-tranche deal, and corporate offerings from General Dynamics,
Humana, Proctor and Gamble and Thermo Fisher among others.
On 24 March, Kingdom of Spain placed a EUR10 billion syndicated
seven-year deal, which gained final demand of EUR36 billion at
pricing of 0.84%, 18 basis points over the Spanish government's
outstanding debt. Slovenia sold a EUR850 million three-year deal
with a 0.2% coupon, priced at 50 basis points over mid-swaps. It
also tapped its EUR1.85 billion 1.1875% 2029 issue with a further
EUR250 million.
Dollar supply also was active. Kingdom of Sweden sold USD2
billion of two-year debt with a 0.75% coupon, at a 40-basis point
spread over US Treasuries. Other issuance included a USD4 billion
three-tranche package for Mastercard including seven, 10 and
30-year bonds, and a 10-year deal for Kimberly Clark.
The market remained active on 25 March, with new
Euro-denominated supply including a four, 6.5 and 10-year package
for US conglomerate Danaher, a seven-year benchmark for Carrefour,
and issuance by Lloyds Bank and Goldman Sachs.
Lloyds Bank attracted an impressive EUR8.25 billion of demand
for its EUR1.5 billion six-year deal, while Goldman Sachs raised
EUR3 billion, howbeit at a 355 basis point margin, described by
Bloomberg as equivalent to four times the spread it had paid for
10-year Euro-denominated debt earlier this year. Credit Suisse and
NatWest Markets then entered the markets, with the latter rapidly
gaining EUR4.5 billion in demand for a five-year issue.
Dollar supply also was impressive, with ten borrowers seeking
USD23.5 billion: these included Archer Daniels Midland, Deere, and
3M.
Outlook and implications
During this week, IHS Markit has moved to adjust GDP projected
trajectories further downwards. In turn, the spread of COVID-19 and
wider lockdowns increase the need for extraordinary fiscal
measures, combined with large scale quantitative easing.
Against this background, there are two key implications:
Companies face sharp declines in revenues, in some cases with
an almost total temporary cessation of revenues. While some of the
damage to their cash flow and capital position should be offset by
government intervention measures, companies are likely to borrow in
heavy volume during periods of market receptivity, while drawing
down standby lines from the banking sector, pressurizing financial
sector liquidity. This indicates clear likelihood of the
continuation of the recent heavy issuance whenever market
conditions permit, involving both bank and corporate issuers.
Riskier credits face acute challenges: this was already
indicated last week when the average spread on US junk bonds moved
into double digits, a traditional indicator of debt distress. This
week's events suggest that emerging market default risk now also is
substantially worsening. This risk applies very clearly in
Argentina, with the IMF's continuing calls for heavy private sector
write-offs likely to meet private investor push-back against the
goal of achieving full payment for official creditors. A long and
potentially stand-off is a clear risk, which would be damaging for
Argentina's economic prospects and its goal of attracting fresh
investment capital, particularly for its Vaca Muerta energy
development.
African debt stress is also severe, illustrated by the
collective moves to achieve relief on near-term debt service
burdens. If these apply to only official creditors and concessional
lenders, this would require the agreement of relatively few bodies
and would avoid triggering technical default on public debt. In
this regard, the World bank/IMF statement is clearly positive,
indicating a strong likelihood of debt relief on official debt for
poorer states and potentially others facing severe debt
stresses.
Lastly, despite the unprecedented surge in borrowing needs,
quantitative easing appears to be succeeding in preserving market
stability. In this regard, Spain's successful issuance this week,
is a clearly-encouraging indicator that QE will help states heavily
affected by COVID-19 to preserve market access.
Posted 26 March 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence