23% of the pension funds are invested in Eurobonds, so if the government were to repurchase this debt, the contributors would be the ones who would receive a low return.
The repurchase of bonds that the government announced on Monday as part of a fiscal strategy to avoid defaulting, could affect almost a quarter of workers’ pension savings, since 23% of this money is invested in Eurobonds that the Treasury want to buy cheaper.
This was warned by several economists after learning of the call to repurchase the bonds maturing in 2023 and 2025 and that together add up to a debt of $1.6 billion.
To cancel them, the government offered on Monday an amount of $360 million, which means only 22.5% of the total debt acquired.
“Part of the Eurobonds are held by the pension funds, so by buying the bonds below their value, the assets of the pension funds could be affected if they enter the repurchase process,” explained economist José Luis Magaña .
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“The pension funds are already with negative profitability for buying bonds from El Salvador. If they sell the bonds at less than 100% of their value, it is equivalent to losing capital. Let them trade with the vulture funds, but not with the workers’ savings,” the economist Rafael Lemus reacted yesterday on Twitter.
It was also confirmed by the former president of the Central Reserve Bank and president of the Foundation for the Development of Central America (Fudecen) Oscar Cabrera. “In fact, the entire secondary market that invested in these two bonds is going to be affected, depending on the repurchase,” he explained.
For now, nothing is set in stone as the AFPs can refuse to sell the bonds below their value just like any other holder of those bonds.
Cabrera affirmed that it is necessary to wait until September 20 to find out if the AFPs will decide to sell their papers at a lower value. The same would happen with other private investors who have acquired these State debt papers.
“Obviously, it would be necessary to finalize how the repurchase took place and what percentage of that repurchase was made by the AFPs or some local investors. I would wait until completion,” Cabrera said.
In addition, Magaña explained that the purchase conditions would have to be the same for all investors. The government could not pay some more and others less, because as it is an international bond issue, all are subject to international regulations.
“If the government says that the Eurobonds in the hands of the pension funds are always going to be paid at 100%, there is a clause in the issue contracts called Pari Passu, which establishes that all the bonds of the same issue must have the same treatment. Then, any other bond holder could demand compliance with equal treatment given to pension fund bonds,” the economist explained.
Workers’ pension savings have lost profitability in recent months because much of that money is invested in Eurobonds, which have lost their value, following the high risk of default in the country.
This has had an impact on the account statement of many contributors, who, contrary to receiving profits, have seen a decrease in their savings.
If the AFPs decided to sell their bonds at a lower price, this would mean a further reduction in the profitability of workers’ savings.
more mistrust
The announcement of the repurchase of bonds is also an unusual event for Cabrera, who makes two readings of it: on the one hand, it can be beneficial because the country has a high debt of more than 80% of GDP and its monetary policy is limited by dollarization.
But on the other hand, he considers that far from generating confidence, it could provoke the opposite among investors.
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“The fact of announcing a repurchase of bonds means that there is a high probability of non-payment and that is how many investors and risk rating agencies see it. He goes out to recognize that he cannot pay the entire debt, ”he pointed out.
He also indicated that “we do not know the final balance of this position. It will depend on whether or not the Salvadoran government has the capacity to finalize the agreement with the Monetary Fund. It is not the most fortunate thing to repurchase bonds in an environment in which negotiations with the fund are probably stalled given the lack of transparency.
The Minister of Finance, Alejandro Zelaya, acknowledged a few weeks ago that with the announcement of the debt repurchase, the intention is to improve El Salvador’s image given the risk profile it maintains in the markets.
However, yesterday the price of all Salvadoran bonds closed in the red, with falls of between 0.29% and up to 1.98%, which gives Cabrera a signal that investors are probably not interested in buying back the government. .
Magaña also warned that this action will make it more difficult to obtain financing in the near future.
“Making this financial maneuver is going to make it difficult to access the financial market for a while. What is the contingency plan? A strategy like this could only be financially and socially sustainable if it is accompanied by progressive tax reform, and it could still go wrong,” he noted.
Cabrera explained that in 2012 Greece bought back part of its debt, but behind it was the Troika (European Commission, European Central Bank and International Monetary Fund) and the investment area of the European Union that lent it money to buy back its bonds. “These are very different conditions,” said Cabrera.