July 4, 2014

Grace period running, Argentina faces more drama over debt

A meeting slated for July 7 could move Argentina and its creditors closer to resolution — or send the country hurtling toward default.

Early last week, Argentina missed a crucial $539 million bond payment to U.S. creditors, putting the country in technical default and starting the clock on a 30-day grace period during which the government in Buenos Aires must make multiple debt payments, renegotiate some of its credit or face its second default since 2001.

An Argentinan delegation and the U.S. court-appointed litigator who is overseeing negotiations with creditors are slated to meet July 7. A default come trigger a large devaluation for the Argentine peso, which has lost 24 percent of its value against the dollar since January.

Argentina’s problem is with a small group of creditors who refuse to accept lower bond-payment terms and have sued the country for the full $1.5 billion they say they’re owed. Argentina, which has renegotiated with 92 percent of its creditors to take less than they were owed, has said it simply can’t afford to pay the full amount and that agreeing to pay the small group in full would scotch its deals with the others.

“If Argentina defaults on everybody, this will be a very dramatic event for the Argentine economy,” said Anna Gelpern, a professor at Georgetown University in Washington who is a fellow at the Peterson Institute, a nonprofit international economics research center. “They’re all out of legal leverage.”

The creditors and the Argentine government said repeatedly in June that they were willing to negotiate. But Jay Newman, senior portfolio manager at Elliott Management, which runs the subsidiary hedge fund that’s suing Argentina, said the country’s willingness was unclear.

“There have been no negotiations,” Newman said during an appearance on CNBC. “We hope Argentina will come to the table, but so far there’s been no sign of it.”

Argentina’s Ministry of Economy released a brief statement earlier this week that said the economic minister, Axel Kicillof, had appointed a delegation to meet July 7 with Daniel Pollack, the court-appointed litigator who is overseeing negotiations between the hedge fund, NML Capital, and Argentina. A spokesperson for Argentina’s lawyers in New York declined to comment for this article.

A decade-long legal battle between Argentina and U.S. creditors came to a head June 16, when the U.S. Supreme Court denied Argentina’s appeal and upheld a New York federal court order that required the country to pay the bondholders of original and restructured debt at the same time.

Last week, Argentina attempted to circumvent the district court’s ruling and pay $539 million just to the holders of restructured debt, but Thomas Griesa, the district court judge, blocked the payments, saying they were illegal. Griesa also rejected Argentina’s June 23 request for a stay to permit more time to negotiate.

“The holdouts have the advantage,” said Eugenio Aleman, senior economist at Wells Fargo Securities in Charlotte, N.C. If Argentina doesn’t pay, it’s “going to be in trouble.”

Aleman estimates that if Argentina defaults, the peso’s value might be cut in half. The current official exchange rate is eight pesos to the dollar, though the rate at which most Argentines exchange pesos for dollars is really about 12 to 1, according to La Nacion, one of the country’s largest newspapers.

“Argentina needs to negotiate,” said Joaquin Almeyra, a fixed-income trader at Bulltick Capital in Miami.

Argentina must pay both the holdout creditors and restructured debts by July 30 to avoid default, according to Griesa’s court order.

Argentina’s president, Cristina Fernandez de Kirchner, said in June that paying both groups of bondholders at once was impossible and would deplete more than half of the country’s international monetary reserves.

Argentina defaulted on $95 billion in debt in 2001, collapsing its economy. Ninety-two percent of the bondholders that purchased Argentine debt accepted a lower-paying bond agreement during negotiations in 2005 and 2010.

Argentina recently reached debt settlements with the Spanish petroleum company Repsol and the Club of Paris, the name for finance officials from some of the world’s largest economies, in an attempt to regain access to foreign credit markets, which shut out the country after its 2001 default. The foreign capital is needed to develop a large shale-oil deposit called “Vaca Muerta”' – “dead cow”' – that could be an economic boon for Argentina, said Aleman, the economist.

“They think Vaca Muerta is their way out,” said Aleman.

Newman, the NML Capital representative, told CNBC that Argentina’s deals with the Club of Paris and Repsol could be a template for resolving the country’s standoff with the hedge fund.

But the road to an agreement appears long, experts said.

“My money is on Argentina wanting to negotiate,” said Gelpern, the Georgetown professor. But “I can’t see how they get it all done before July 30.”

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