Decree 596/2019: A Warning for CDS

The Argentine government, by Decree 596/2019 published on August 29, has postponed the payment of certain short term Treasury bills (“Argentine T-Bills”), which are subject to Argentine law and denominated in domestic currency and in foreign currency (i.e. US Dollars).

The Argentina T-Bills affected by the postponement (the “Affected T-Bills”) are the LETEs (Letras del Tesoro en Dólares Estadounidenses), LECAPs (Letras del Tesoro Capitalizable en Pesos),  LELINKs (Letras del Tesoro vinculadas al Dólar Estadounidense),  and LECERs (Letras del Tesoro en Pesos Ajustables por CER). The Affected T-Bills are listed in an Annex to Decree 596/2019.

In addition the Government announced its intention to start a process under the collective action clauses to negotiate an extension of the maturity of the Argentine Government bonds governed by foreign law without any principal haircut or reduction in the interest rate. The government expects that this process will result in a voluntary change in the profile of such indebtedness, but announced its intention to continue making all payments under such Argentine Government bonds until such negotiation concludes. In connection with the Argentine Government bonds issued under Argentine law, the Government announced that it would send a bill to Congress to carry out a voluntary extension of the maturities without haircut or reduction in the interest rates.

The details of this process are unclear and no formal actions have been taken by the Government yet.  

The announcement and measures taken by the Argentine Government are being followed with close attention by the parties to Credit Default Swaps whose Reference Entity is the Argentine Government.

The occurrence of Credit Event in connection with the Argentine Government would depend, among other things, on the specifications of the Obligation Category and Obligation Characteristics. In most cases in which Argentina is the Reference Entity, it is to be expected that the Obligation Characteristics will include Not Domestic Law, Not Domestic Issuance and Specified Currency (more likely, US Dollars) or Not Domestic Currency. Therefore, the postponement of payments in the Affected T-Bills is unlikely to have an immediate impact on those Credit Default Swaps.

However, the manner in which the Government carries out the process of negotiating the extension of the maturity of its indebtedness has to be followed carefully, especially in connection with the collective action clauses under Argentine governmental bonds governed by foreign law, since it could at some point result in a Credit Event such as Restructuring or even Repudiation/Moratorium.