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Categorized | Capital Markets

Hopes remain of deal on Argentine debt

Posted on July 31, 2014

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Argentina’s debt saga has been dragging on for more than 12 years and, with the country slipping back into default on Wednesday, it is far from over. Hopes remain that a deal with the private sector can still be reached.

A last-minute proposal by a group of Argentine banks collapsed behind the scenes shortly after economy minister Axel Kicillof announced that the “vulture funds” had rejected the government’s offer. But other proposals are in the works, according to local media.

    “This isn’t over yet,” said Daniel Kerner, an analyst at Eurasia Group in New York. He argues that a settlement involving local banks remains the most likely outcome, with further meetings expected to take place in New York on Thursday.

    A deal would involve a consortium of banks buying the defaulted bonds of the holdout creditors, who rejected debt restructurings following Argentina’s previous default in 2001 but won the right to be paid in full in a 2012 US court ruling.

    Payment of the holdouts – mainly US hedge funds – would enable Argentina to continue paying the rest of its bondholders, after it failed to meet a deadline to pay bondholders on July 30 after its payments were blocked by US judge Thomas Griesa.

    “Other proposals could flourish,” admitted a person involved in the failed negotiations between the banks and the holdouts, who requested anonymity. The proposal, which had been led by the Argentine banking association, Adeba, and had the backing of several US banks, including Citigroup, HSBC and JPMorgan, consisted of an offer to buy the holdouts’ $1.6bn claim at a 20 per cent discount, or $1.4bn, with an initial instalment of $250m.

    Nevertheless, the person admitted to being “confused” by the Argentine government’s actions, and said that opposing factions in the administration of President Cristina Fernández were the main obstacle to a deal with the private sector.

    “Kicillof’s speech scared us away,” said the person, explaining that his unexpected insistence on offering the holdouts the same deal as holders of debt restructured after the 2001 default was at the root of the problem.

    Another person said Juan Carlos Fábrega, the president of the central bank who was understood to have backed the negotiations led by Adeba, was expecting the deal to be announced during Mr Kicillof’s press conference.

    If a deal between the holdouts and the private sector fails to prosper, Argentina has other options.

    “Kicillof said he will use all legal remedies available to solve the new selective default, so perhaps they will adopt local legislation in line with Chapter 9 of the US Bankruptcy Code,” said Marcelo Etchebarne, an Argentine lawyer who follows the case closely.

    “Or perhaps they will attempt to restructure all US and UK law bonds under local law, as suggested by the government’s counsel, which I do not think is feasible,” he added.

    Otherwise, the government could choose to remain in default until the end of the year, when the RUFO (Rights Upon Future Offers) clause in the contracts of Argentina’s restructured bonds that has been the main stumbling block to a deal with the holdouts expires. Since the clause prohibits the holdouts from being paid more than those who accepted restructured debt, its expiration would enable the government to resume negotiations with the holdouts.

    Nevertheless, the outcome remains highly uncertain, with the most pessimistic observers expecting President Fernández to leave the problem unresolved until the end of her term in December 2015.

    “The only thing that’s for sure at this point is that Kicillof has burnt the ships and he’s going to find it difficult to get people to take him seriously in future talks,” said Luis Secco, an economist in Buenos Aires.

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    Mr Secco added that another likely consequence of Argentina’s downgrade to “selective default” by rating agency Standard & Poor’s is that investors in credit default swaps will seek payment.

    “This story has more plot twists than a bad horror film,” said Tim Samples, a professor of legal studies at the University of Georgia.