EM restructuring — spare us the posturing
After striking a remarkably swift restructuring deal with creditors, Ecuador’s government deserves praise. But it is unrealistic to expect such smooth discussions elsewhere, as emerging market sovereign defaults inevitably rise.
While bondholders say Ecuador is an example for other EM nations to follow, the same funds are locked in a tedious back-and-forth with Argentina. Investors batted back this week’s improved offer, appearing to object to the process, or lack of one, as much as the economics of the deal, which many market participants think are fair.
The posturing on both sides is a distraction. Of course, bondholders want issuers to obediently sit down and offer up a deal, but the success of a restructuring cannot be judged on how amicable the discussions have been.
It is absurd to think that if Argentina had just asked nicely, creditors would have accepted bigger haircuts. Argentina is simply throwing its weight around in an attempt to get a better deal. If Ecuador had any weight to throw around, it might well be doing the same.
The real difference between the two is credibility. If you have a credible plan, your exit yield will compress, your restructured bonds will trade better, and you can more easily persuade creditors to extend duration.
Argentina is low on credibility, with no fiscal consolidation plan to speak of. Ecuador’s president Lenin Moreno — safe in the knowledge his approval ratings can hardly go lower and that he won’t be running for re-election in February — has implemented harsh austerity and reforms during the worst economic crisis for a century. No wonder bondholders like him.
If Ecuador can wrangle a sustainable debt stock out of an unprecedented crisis, it will prove to be a masterstroke. But crises are by definition difficult. EM finance ministers will be facing tougher decisions than ever, and bondholders must brace for far tougher conversations than the ones they had in Quito.