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AmericasSeptember 11 2020

Argentine banks take stock of $65bn sovereign debt deal

Total sovereign exposure at private sector lenders has risen this year on back of weak loan demand.
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Argentine banks take stock of $65bn sovereign debt deal

Argentina’s government struck a $65bn deal with private creditors in late August to restructure the country’s sovereign debt following months of acrimonious wrangling. The debt exchange, enabling creditors to swap old bonds for new ones, extended maturities on the debt and lowered interest rate payments from an average of 7% to about 3%.

The negotiations took place against the fallout from the Covid-19 pandemic which has hammered the country’s economy, shrinking gross domestic product by 12.9% in the first half of the year compared with the same period in 2019. The return to power of a Peronist government in October last year led by president Alberto Fernández resulted in the country’s ninth sovereign debt default and led to widespread fears of a messy and protracted fallout.

“In the end, the terms of the debt deal were not as bad as many expected,” says Santiago Gallo, director, Latin American financial institutions at Fitch Ratings. “The pandemic supported the government’s argument that it needed to restructure the debt.”

Argentine banks’ profitability has already been eroded this year by inflation adjustments and interest rate caps forcing banks to invest excess liquidity in public sector assets, such as central bank securities and sovereign bonds, given the lack of alternative profitable options.

In May this year, the total sovereign exposure in Argentina’s financial system stood at 24.7%, according to Fitch.

In order to gauge the implications of the debt deal on the banking sector, it’s important to differentiate between Argentina’s state-owned banks and private lenders, according to Mr Gallo.

The banking system in Argentina consists of 64 banks, including 13 government-owned financial institutions and 51 private-sector banks, according to the central bank.

State-owned banks include Banco de la Nación Argentina, the country’s largest lender, as well as Nación Ciudad Provincia, Banco Ciudad de Buenos Aires and Banco Provincia. The country’s biggest private sector banks include Banco Galicia, BBVA Argentina and Banco Macro. In addition, various foreign institutions have Argentine subsidiaries and affiliates such as BNP Paribas Argentina, Banco Santander Rio and HSBC Bank Argentina.

Private sector exposure

In private sector banks, total sovereign exposure has risen this year on the back of weak loan demand.

Argentina’s central bank, Banco Central de la República Argentina, has adopted an interventionist policies as it grapples with the pandemic, capping interest rates offered on loans and placing floors for deposit rates.

Forbearance programmes, meanwhile, exclude bank holdings of newly issued sovereign debt from regulatory limits for public-sector debt exposures which have increased Argentine banks’ overall exposure to the public sector.

As a result, private sector banks’ sovereign exposure in terms of assets rose to 21.8% in May 2020 from 16.8% on December 2019, according to Fitch.

However, Mr Gallo says it was important to note that “most private sector sovereign exposure is with the central bank, not within sovereign bonds or loans to state-owned entities or the government.”

Argentine banks’ profitability has already been eroded this year by inflation adjustments and interest rate caps

Mr Gallo adds that loan growth has been low because of the economic crisis, although bank deposits have continued to grow. “The only relatively low risk and profitable place where [banks] can allocate liquidity is in securities of the central bank, driving a large exposure,” he says.

Therefore, private sector banks’ sovereign exposure – excluding the central bank – stood at only 4.5% of total assets in May 2020, according to Fitch.

“In the case of the private sector banks, we really don’t expect to see a big impact from the sovereign debt exchange because actual holdings of sovereign bonds are very small,” Mr Gallo adds.

State banks’ exposure

State-owned bank sovereign exposure, meanwhile, in terms of total assets stood at 30.3% in May 2020, up from 28.3% on December 2019 but less than 35.2% in December 2018, according to Fitch. However, the ratio falls to 18% when central bank exposure is excluded.

The state-owned banks in Argentina are led by the huge Banco de la Nación, which presided over 1400bn pesos in assets ($23.5bn) in June 2020, according to The Banker Database. The bank accounts for about 60% of the total assets of the 13 state-owned banks.

“Banco de la Nación is the state bank with the main sovereign exposure but we do not expect the impact to be that big because the market as already factored in a lot the risks associated with the sovereign,” Mr Gallo says.

The yield on a 4-year Argentine government bond, for example, stood at 44.1% in early September, down from 58.8% at the start of the year.

“The terms of the exchange debt exchange really were not that bad for bond holders. The haircut was quite small. The key change was the fact the government pushed the maturity forward five or six years,” Mr Gallo says.

The agreement reduces what Argentina needs to pay over the next five years, but it’s likely a new agreement will have to be reached when many bonds mature in 2025. The debt exchange essentially does little more than kick the can down the road for the next five years.

Banks’ public-sector holdings are expected to decline gradually when private sector lending resumes, according to Fitch, but that will be dependent on the pace of economic recovery.

The sovereign debt restructuring is just one of many only steps the Argentine government needs to take to reduce the country’s crippling macroeconomic imbalances, Mr Gallo adds. The next step is to negotiate a new multi-billion dollar debt facility with the International Monetary Fund.

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