Argentina’s debt restructuring this year could prove to be a major turning point, helping to put a climate-sustainable future within reach. In a new paper, Mike Hugman (Portfolio Manager at Investec) collaborates with Alexandra Pinzon-Torres (Sustainable and Conservation Finance Policy Fellow at Grantham Research Institute on Climate Change and the Environment), to discuss the challenges and opportunities facing Argentina this year.
The need to restructure debt brings both challenges and opportunities
This year Argentina needs to work with investors to agree on a restructuring of its public sector debt and come to an agreement with the IMF over its liabilities. This will undoubtedly bring significant challenges to both Argentina and its bondholders. But it also offers up a real opportunity for the country to free up the necessary investment for a truly climate-sustainable future.
From the perspective of investors, we believe such a shift towards climate-sustainability is vital to reduce the risk of further defaults. Put simply, 2020 will be a critical year for establishing the long-term sustainability of Argentina’s economy and growth model.
Why a shift to climate-sustainability is vital for Argentina and its bondholders
The Argentine economy’s heavy reliance on carbon-intensive agriculture gives rise to major long-term transition risks for its current production model. Significant extra funds will be needed for it to be able to meet its medium and long-term climate commitments. While in the shorter term, the country faces rising risks to economic growth from climate shocks; a recent example is the 2018 drought, which was a central cause of the subsequent self-fulfilling currency crisis. Any debt restructuring programme should integrate fully natural capital and climate-sustainable investment risks and financing.
As we’ve discussed before, climate considerations – the ‘E’ in ESG – have been overlooked somewhat in sovereign debt investing. But the case of Argentina highlights how the need to redress this has become more urgent, and the costs of not doing so more tangible and sizeable. Fortunately, recent academic research provides useful insights: climate risk modelling and sustainable investment gap analysis.
The opportunity to forge a climate-sustainable path
If private bondholders are prepared to support a climate-sustainable restructuring of Argentina’s debt stock, this should create equivalent obligations on the part of public sector creditors and the Argentine government. This paper discusses how this could work in practice.
In return for private and public creditor support for climate sustainability, this paper proposes that all additional* savings generated in a climate-sustainable restructuring and rescheduling process should be ring-fenced, with an obligation on the Argentine authorities to use those funds to invest in climate mitigation and transition policies. This model is similar to the approach employed in Nigeria, where savings from the extraordinary Paris and London club debt restructuring in 2005 were ring-fenced for spending on the MDGs (Millennium Development Goals) and supervised under a voluntary IMF Policy Support Instrument programme delivering tangible development gains (Dijkstra, Vol. 31 No 5, September 2013).
For our part, we will assess the debt restructuring proposals taking into account their climate sustainability, and determine our long-run portfolio exposure accordingly.
*Additional savings would be the difference in annual interest payments on debt generated by a greater NPV reduction in liabilities under a climate-sustainable restructuring/rescheduling, relative to a restructuring/rescheduling conducted on narrow, conventional economic terms.
Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
The value of investments, and any income generated from them, can fall as well as rise.