Repurchasing bonds will affect a portion of your pension savings

23% of pension funds are invested in Eurobonds, so if the government buys back this debt, it will be the shareholders who will get a lower return.

The bond buyback, announced by the government on Monday as part of a fiscal strategy to avoid default, could affect nearly a quarter of workers’ pension savings, with 23% of that money being invested in Eurobonds that the Treasury wants to buy cheaper.

Several economists have warned of this after learning of the call to buy back bonds due in 2023 and 2025 which together add up to $1.6 billion.

To cancel it, the government on Monday offered $360 million, which is only 22.5% of the total debt acquired.

Economist Jose Luis Magana explained that “a portion of Eurobonds is held by the pension fund, so by buying bonds that are undervalued, pension fund assets can be affected if they go into repurchase.”

Read also: What does it mean when the government buys bonds? This is what economists explain

Pension funds already have a passive profitability of buying bonds from El Salvador. If they sell the bonds for less than 100% of their value, this equates to a capital loss. Economist Rafael Lemos responded yesterday on Twitter.

As confirmed by the former head of the Central Reserve Bank and President of the Central American Development Corporation (Fudecen) Oscar Cabrera. “In fact, the entire secondary market that invested in these two bonds will be affected, depending on the buyback,” he explained.

At the moment, nothing is fixed in the rock that AFP can refuse to sell a bond for less than its value just like any other holder of that bond.

Many contributors do not want to retire yet because they think that the pension will not suffice them.

Cabrera stressed that it is necessary to wait until September 20 to see if AFP will decide to sell its papers at a lower value. The same will happen with other private investors who have obtained these government debt securities.

“Obviously it will be necessary to finalize how the buyback is done and what percentage of the buyback was done by AFP or some local investors. I will wait until it is finished,” Cabrera said.

In addition, Magana explained that the terms of purchase should be the same for all investors. The government could not pay some more and some less, since it is the issuance of international bonds, they are all subject to international regulations.

“If the government says that Eurobonds in the hands of pension funds will always be 100% paid, there is a clause in the contract issue called Pari Passu, which says that all bonds of the same issue must have the same treatment. After that, any other bondholder can To demand compliance with equal treatment of pension fund bonds,” the economist explained.

Workers’ pension savings have lost their profitability in recent months because much of that money is being invested in Eurobonds, which have lost their value, after the country’s default risk rose.

This affected the balance sheet of many shareholders who, in contrast to receiving dividends, saw a decrease in their savings.

If AFP decides to sell its bonds at a lower price, this means a further decrease in the profitability of workers’ savings.

More distrust

The announcement of the bond buyback is also an unusual event for Cabrera, who made 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 dollar-limited.

But on the other hand, it is considered that far from generating confidence, it can lead to the opposite among investors.

Read also: Government offers only $360 million to purchase bonds totaling $1.6 billion

“The fact that bond buybacks have been announced means there is a high probability of default and that’s how many investors and risk rating agencies are seeing. He came out to realize he couldn’t pay the debt in full.

He also noted that “we don’t know the final balance of this situation. This will depend on whether or not the Salvadoran government has the ability to complete the agreement with the IMF. It is not a good idea to buy back bonds in an environment where negotiations with the Fund may be stalled due to a lack of transparency.

Finance Minister Alejandro Zelaya acknowledged a few weeks ago that with the announcement of the debt buyback, the goal is to improve El Salvador’s image given the risk profile it maintains in the markets.

However, prices of all Salvadoran bonds yesterday closed in the red, with a drop between 0.29% to 1.98%, giving Cabrera a likely indication that investors are not interested in a government buyback.

Magana also warned that this measure will make it difficult to obtain funding in the near future.

“Doing this financial maneuver will make it difficult to access the financial market for a while. What is a contingency plan? A strategy like this can only be financially and socially sustainable if it is accompanied by progressive tax reform, and it can still go wrong.”

Cabrera explained that in 2012 Greece bought part of its debt, but behind it was the troika (the European Commission, the European Central Bank and the International Monetary Fund) and the EU investment zone that loaned it money to buy back its bonds. . “These are very different circumstances,” Cabrera said.

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