Argentina Is Buckling Under Strain of $174 Billion Debt Mountain

(Bloomberg) — Cut off from global credit markets, Argentina’s government is selling ever more local currency bonds, amassing a debt load that already totals 33 trillion pesos ($174 billion) and is rising almost exponentially.

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In one week, the Treasury will seek to roll over 300 billion pesos of debt, offering higher interest rates and shorter maturities to entice investors as they have in each of the previous four months.

For Fabricio Gatti, a portfolio manager at Novus Asset Management in Buenos Aires who holds the notes, that tactic will only work for another few months. By the second quarter, investors may refuse to roll over the securities ahead of presidential elections in October, potentially ushering in Argentina’s second default on local currency debt in four years.

“Investors are going to be increasingly scared by the possibility of a restructuring,” Gatti said. They are hoping “that the government will continue rolling over its debt until a new government takes office, but that path isn’t assured yet.”

Argentina’s Economic Planning Secretary Gabriel Rubinstein said in a Twitter post the debt in pesos was sustainable and manageable, adding that Treasury debt held by private investors only represented 8% of gross domestic product. A spokeswoman for Argentina’s Economy Ministry declined to comment.

Here are some charts to illustrate Argentina’s mounting debt burden and its impact:

Ballooning Debt

The Treasury rolled over debt in January and sold almost 220 billion pesos in new bonds. The bulk of the securities sold under President Alberto Fernandez’s administration are linked to inflation, which is soaring at an annual pace of almost 100%. So the explosion in inflation, rather than providing a big dose of debt relief, is straining fiscal coffers even further.

Debt Burden

Argentina posted a primary deficit of 2.4% of gross domestic product last year. Cut off from global markets since it restructured $65 billion of overseas bonds three years ago, that deficit has to be financed by the local market. And with the government trying to avoid printing money to slow inflation, the debt is weighing more heavily on the economy.

Debt Wall

Argentina faces a wall of debt coming due starting in April, with an average of about 2 trillion pesos maturing monthly through the third quarter. Creditors are increasingly reluctant to rollover those securities for any extended period on fears the government will ramp up populist spending ahead of the October elections. Ratings agencies have already sounded the alarm, cutting the nation’s local currency rating to selective default in January.

Higher Rates

As the debt load mounts and the threat of reprofiling looms, many private sector investors are holding out for the government to offer ever higher interest rates, said Juan Manuel Pazos, chief economist at TPCG Valores in Buenos Aires.

Longer Maturities

The Treasury hasn’t rolled over any debt with a maturity of eight months or more since September, in sharp contrast to earlier in the year. No debt sold in the open market in the last four months will come due after the parties hold primaries in August. It was the success of the left wing in those primaries four years ago that sent Argentine assets tumbling.

“At some point, no carrot will be large enough for private sector investors to participate, and they will opt to hold out,” Pazos said. “But we’re not there yet.”

Silver Linings

The vast majority of Argentina’s local securities are held by public institutions like the state pension fund and state-owned banks, which typically roll over their debt. Private investors such as banks, mutual funds and insurance companies are also regulated and many will be obligated to continue investing, according to Adrian Yarde Buller, chief economist at Facimex Valores in Buenos Aires.

The fact those investors have rolled over their debt has enabled Argentina to slow money printing in the last year as it tries to meet targets set out under its $44 billion program with the International Monetary Fund.

Should investors stop rolling over debt in the second quarter as some forecast, the central bank will have to resume money printing, fueling inflation and increasing pressure on the government to devalue its official exchange rate, according to Javier Casabal, a fixed income strategist at Adcap, a local brokerage. That in turn adds to pressure for a reprofiling of the debt.

“If Argentina doesn’t manage to refinance its local debt, the market will start to get nervous, and we could see more pronounced redemptions from mutual funds,” Casabal said. “There are already redemptions, but for now, everything is still manageable.”

–With assistance from Patrick Gillespie and Shin Pei.