For years, meeting obligations has been the be-all and end-all of emerging market debt management. Pay your debts, or wave goodbye to international investors.
Restructuring debt was painted by many as the death knell of international investment in an emerging market.
But with around $17tr in negative yielding bonds in the higher rated markets, is it really likely that investors will en masse drop their participation in a country’s debt issues over a restructure?
Certainly, they will pout and fight any haircut as fervently as any stroppy teenager being told to smarten up. But when the dust settles and they are faced, once again, with the question of where to allocate their resources to obtain the best return, it is unlikely that they will be faced with such a wealth of high yielding debtors that they are able to pick and choose.
EM portfolio inflows are close to a seven year high, thanks primarily to hopes of an effective coronavirus vaccine rollout and a strong global economic recovery.
So far, only a few EM sovereigns have defaulted, in spite of the brutal shock to global trade. And, at least for Argentina and Ecuador, the process has been swift and somewhat civil, relative to some of the battles that the region has seen in the past.
Will investors desert those credits? Perhaps temporarily, but their ire is unlikely to last long. A restructuring should offer a fresh start and, in a sense, prove credit-positive since the result should be a manageable debt burden.
The central banks of the economically developed world have promised low rates and yield curve control for the foreseeable future, so the universe of negative yielding debt is only going to increase next year but, with many investors betting on strong economic recovery, demand will be fierce for emerging market assets.
There’s never a good time to default, but now is the best chance you’re going to get. If liability management can get your curve into shape, then that’s well and good, but if restructuring is going to be necessary sooner or later, then sooner is infinitely better.
Let investors swallow the haircut and get back to borrowing. They’ll get back to lending.