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Doubts return on Argentina creditor deal
From the Financial Times of Mon, 15 Dec 2014 09:11:26 GMT

Doubts over whether Argentina will be forced into a deal with its so-called “holdout” creditors have been revived after the failure of the dollar-starved government to gain financial breathing room with a bond issue and debt swap.

A cool market reaction to the government’s latest debt offer will complicate an already precarious economic situation that has only worsened since a debt default in July triggered by a collapse in talks with the holdout creditors.

The government was hoping the debt issue would boost foreign exchange reserves and remove pressure to reach a swift deal with the group of US hedge funds.

“Unfortunately this result is very bad news,” said Agustín D’Attellis, a member of a group of heterodox economists that works closely with the government, referring to investors only buying $286m of new local law debt of an offer of $3bn, and swapping just $377m of the $6.7bn of Boden 2015 bonds.

“A successful result would have laid the foundations for economic growth to recover without a deal with the holdouts,” he said, adding that the scenario had now become “more complex” as Argentina struggled with a recession amid lower prices of soya, its principal export.

Mr D’Attellis believes that a deal “is not going to happen” early next year when negotiations are expected to resume after the expiry on December 31 of the so-called Rufo clause in bond contracts. This clause prevents the government from paying the holdouts more than the rest of its bondholders who accepted restructurings in 2005 and 2010.

That is because the government is simply unable to meet the inflexible demands of the hedge funds led by US billionaire Paul Singer’s NML Capital, which refused to participate in the restructurings after Argentina’s 2001 debt crisis, Mr D’Attellis said.

But Joshua Rosner, managing director of the financial research company Graham Fisher, argues that the government’s real intentions are revealed by its readiness to pay almost double-digit interest rates on the new debt, about twice that paid by other countries in the region such as Brazil, Mexico and even Bolivia.

“The government’s willingness to enter into an exchange at rates almost double what they would have to pay if they settled with the holdouts suggests the government has no intention of settling the judgment after the expiration of the Rufo clause,” he said, noting thay an end to the long-running dispute would allow the government to return to the international capital markets to issue debt at interest rates as low as 6 per cent.

Mr Rosner pointed to other “desperate” measures taken by the government recently that were aimed at attracting foreign investment in order to avoid settling with the holdouts, such as reforms to an energy law that he described as “a giveaway to big oil”.

The government has sought to bolster its foreign reserves with an array of creative methods, most significantly through an $11bn currency swap with China. The receipt of the latest tranche of $1bn on Friday pushed central bank reserves above $30bn for the first time since January.

Mr D’Attellis believes that the government may make another attempt at a debt issue next year, even if it is forced to accept interest rates as high as 12 or 13 per cent.

Financial necessity is likely to determine whether or not a deal is reached with the holdouts during the year in office that remains for President Cristina Fernández, whose power and popularity remains intact despite the economic fallout from the default. Many observers agree that she will avoid a settlement if at all possible.

Nevertheless, investors remain optimistic that all of the main candidates running in the presidential elections next October will make it a priority to settle with the holdouts, not least because they are likely to inherit a fragile economy with foreign exchange reserves at critical levels.

“The issue has gone from being a national economic problem to a personal arm-wrestling match between the president and the holdouts,” said Daniel Melhem, managing partner of Knightsbridge Partners, an investment management firm based in Buenos Aires.

“The only solution for this administration and for the one which follows it is to solve the debt problem. When done, this of course will just be one step in the right direction.”

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