Argentina’s new president, Javier Milei, nicknamed “El Peluca” (The Wig) because of his thick hair, started by appearing at election rallies with a chainsaw in his hand to convince voters of the rebuilding of the country he promised in his election campaign. . Now that he has been elected, he begins to take the first steps in reviving an economy in dire straits in an unconventional way, as his character demands, of course.
Amid liberalizations, deregulations, public spending cuts and currency devaluation, the ultra-liberal far-right president also announced an unlimited bond issuance to settle a legal dispute he would otherwise not know how to pay for. So what are Milei’s permanent bonds and what do they do? Let’s go in order.
Milei solution
Milei has a lot of problems now that he has been elected president of Argentina, especially of an economic nature. Buenos Aires must renegotiate a $44 billion deal with the International Monetary Fund, repay creditors involved in a $65 billion bond restructuring in 2020, and face pressure from Argentina for losing a lawsuit over the nationalization of national energy company Yacimientos Petrolíferos Fiscales (YFP). Company with $16 billion payout.
Considering that Buenos Aires must start paying this amount by January 10, YFP poses a problem for the Argentine government. Two weeks to pay $6.2 billion to Burford Capital, the litigation fund responsible for pursuing claims in 2015. But as the Argentinian president openly admitted, Argentina does not have this money after the government rejected his request for compensation. After a 30-day extension, Milei initiated the idea of a permanent bond.
What are perpetual bonds?
Unlimited bonds, English console bonds (consolidated bonds) or perpetual bonds (perpetual bonds) are bonds without maturity date that guarantee the payment of fixed coupons for an unlimited period. In practice, they pay coupons forever and, unlike conventional bonds, have no maturity date.
Experts in the financial world know very well that perpetual bonds are an excellent tool for governments in financial difficulties because the debt is never repaid, only interest is paid (repayment of the bond is at the discretion of the issuer). Thanks to perpetual bonds, Buenos Aires will be able to raise the funds it needs immediately and then manage a steady stream of payments over time. However, risks for savers mainly relate to the reliability of the issuer; difficulty in selling the security to other investors; price volatility, given that the only way to recover capital or part of it is to sell the bond; inflation, which could eat up a large portion of the actual return on coupons offered.
In any case, Argentina is not the first state to consider perpetual bonds: the United Kingdom used perpetual bonds to finance the Napoleonic wars and pay off the debt of the First World War. Recently, more precisely in 2017, Austria issued permanent bonds, while in 2020 this instrument was thought to cover the costs necessary for Europe to fight the covid epidemic.
“Kicillof tax”
But Milei’s proposal (apparently not so strange) is spiced up by the “Kicillof tax”. The Argentine president plans to finance the issuance of permanent bonds with the creation of a tax named after Axel Kicillof, the current governor of Buenos Aires and Minister of Economy during the purchase of the Argentine national energy company in 2013. ? Milei said it was to remind Argentines that “they have to pay a certain amount of dollars every year because of the terrible mistake that Kicillof made.”
Source: Today IT
Karen Clayton is a seasoned journalist and author at The Nation Update, with a focus on world news and current events. She has a background in international relations, which gives her a deep understanding of the political, economic and social factors that shape the global landscape. She writes about a wide range of topics, including conflicts, political upheavals, and economic trends, as well as humanitarian crisis and human rights issues.
