Hopes for a resolution early next year of Argentina”s legal dispute with its “holdout” creditors have faded thanks to a $3bn bond issue and an offer to swap or cash in $6.7bn of debt maturing next year that closes on Friday.
If enough investors take up the government”s offer, this could bolster foreign exchange reserves and give Argentina the financial flexibility it needs to avoid being forced into a rushed settlement with a group of US hedge funds led by billionaire Paul Singer”s NML Capital.
After negotiations collapsed in July triggering Argentina”s second default in 13 years, markets expect talks to resume in January when a key clause in bond contracts expires. A deal would enable Argentina to resume borrowing on the international capital markets, which it has been unable to do since its 2001 default.
But analysts say Argentina may not be in such a rush to borrow abroad if it pulls off the $3bn issue of 2024 bonds under local law, which would sidestep a US court ruling in favour of the holdouts that prevented Argentina from paying its bondholders without paying them too, and so triggering the July default.
Still, this financial freedom comes at a price: the 8.75 per cent interest rate on the new bonds is more than double what is paid by other countries in the region like Brazil, Mexico and even Bolivia, explaining why Argentina has avoided issuing new debt in foreign currency for more than seven years.
The debt swap, which gives investors the opportunity to exchange 2015 bonds for those that mature in 2024, would take further pressure off Argentina”s financial commitments next year, with the 2015 bonds representing about half of Argentina”s $13bn of debt payments due next year.
Meanwhile, the government is billing its offer to investors to receive early payment of their 2015 bonds as another sign of its willingness to pay its debt, despite being prevented from servicing its foreign law bonds by a US court order until it reaches a deal with the holdouts.
This will calm market speculation that the government was planning to default on the 2015 bonds next year or convert them into local currency.
Nevertheless, there is broad consensus among analysts that the terms of the offer do not offer sufficient incentives to ensure widespread participation, especially among foreign investors who hold around 70 per cent of the bonds maturing in 2015. It remains to be seen whether the government will adjust the terms or extend the offer.
Depending on the success of the offer in bolstering foreign exchange reserves, which have also been supported by such measures as a foreign currency swap with China, the government may also be able to postpone a devaluation, which analysts argue will eventually be inevitable.
“The strategy of the government could be to muddle through until elections, leaving the resolution of the holdouts issue for the next administration,” said Miguel Kiguel, a former finance secretary who runs the EconViews consultancy.
“However, it will have to keep an eye on the risk of acceleration, especially on Par bonds,” he added, referring to the potentially chaotic scenario that could be triggered if investors demand immediate payment of bonds that defaulted earlier this year.
