The tool of perpetual bonds to service the debt of the perpetually sick and asthmatic Argentina is intended to be used by the President of Argentina, Javier Millay.
More specifically, the Argentine president by issuing perpetual debt seeks to repay a $16 billion bond – money that had been used to renationalize the country’s public energy company Yacimientos Petrolíferos Fiscales (YFP). It is recalled that YPF was privatized in 1993 and was bought by the Spanish company Repsol S.A. in 1999. The new company was named “Repsol YPF”. The renationalization of 51% was started in 2012 by President Cristina Fernandez de Kirchner – but it was a wrong practice.
The Argentine government, after a long legal battle, was defeated in international courts and finally agreed to pay compensation.
And now it’s time to start paying the plaintiffs by January 10, with the first $6.2 billion going to Burford Capital.
The perpetual debt
In any case, perpetual bonds are the solution proposed by Argentina’s new president, Javier Millay, in an attempt to fix his country’s public finances. The only thing that is certain is that there is no money in the country of the once mighty country of Latin America.
Hence the assumption of an unlimited time bond, known in English as consols bond (consolidated bonds) or perp – short for “perpetual”. The reason for a bond with no duration, intended, in theory, to pay fixed coupons for an infinite period of time. Its main advantage is considered to be the prospect of securing a steady flow of product payments. On the other hand, its main disadvantage is the inability to repay the collateral.
Also, as far as the specific financial instrument is concerned, there are other risks, to which Argentina is particularly sensitive. More specifically:
- the fluctuation of interest rates,
- the credibility of the publisher itself and
- the difficulty of reselling the security to other investors.
The issuance of the Argentine bond will in turn be financed by the imposition of a tax called the “Kicillof tax”: a direct reference to the current governor of Buenos Aires and Minister of Economy at the time of the renationalization of YPF in 2013 Axel Kicillof. The goal, in Millay’s own words, is to remind all Argentines that “they have to pay a certain amount every year because of the monstrous mistake made by Kicillof.”
The plan to reduce the Argentine debt without cutting its nominal value, by exchanging the official institutional debt to the IMF and lenders in general with a different type of bonds: the so-called “perpetual” bonds with a growth clause.
You were talking about a “haircut” but it will not be a typical “haircut” and thus it will not appear as bankruptcy.
Perpetuals, which are long-term bonds of up to 100 years or never expire. The Argentine president’s proposal for a debt swap would be a form of “smart debt engineering” that allows avoiding the use of terms such as “haircut”, politically unacceptable to creditors.
In this way, the president of Argentina is trying to reform his country by giving his creditors fiscal room to do so. Otherwise, Argentina will continue to suffocate.
