Press

IT MAY have taken 14 years, but the holders of $900m of bonds on which Argentina defaulted in 2001 should soon be repaid. On February 2nd Alfonso Prat-Gay, Argentina’s new finance minister, announced a deal with Italian bondholders worth $1.35 billion, or 150% of the principal. The “pre-agreement” (it still has to be approved by Argentina’s Congress) is fairly small: it covers only 15% of the “holdouts” who rejected restructurings in 2005 and 2010. But it sets an important precedent. The creditors had been seeking $2.5 billion, including outstanding interest payments, and Argentina hopes to persuade the remaining 85% to accept a similar write-down. The omens for a wider deal, however, are not promising.

Argentina’s $82 billion sovereign default in 2001 was the largest-ever at the time. Some 93% of bondholders subsequently agreed to exchange their defaulted debt for new securities, accepting a write-down of 65%. But the original bonds had not included “collective-action clauses”, under which a restructuring could be forced on all bondholders if a certain proportion of them agreed. The remaining creditors rejected the offer, with some pursuing full payment through the courts instead. A group of them, led by Elliott Management, a hedge fund, has secured a number of victories in courts in New York, under whose law the original bonds were written. One of those rulings barred Argentina from paying interest on the restructured debt unless it also paid the holdouts in full. The court also forbade banks with operations in America from facilitating such payments.

As a result, Argentina defaulted on the restructured bonds in 2014. (An attempt to get around the ruling by making payments to the restructured bondholders in Argentina, beyond the reach of New York’s courts, fizzled.) The defaults upon defaults have restricted Argentina’s access to international credit markets and hampered efforts to resuscitate its ailing economy. In December Mauricio Macri, Argentina’s new president, took office promising to strike a deal with the holdouts and return the country to economic health. It helps that a clause in the restructuring deals obliging Argentina to extend any improved deal it strikes with the holdouts to all the original bondholders has expired.

After preliminary meetings in December and January, Argentine officials opened formal negotiations with Daniel Pollack, a court-appointed mediator, and a number of the holdout bondholders in New York on February 1st. The first day of meetings lasted only four hours; Argentina conceded that it was “still working” on a new offer.

Mr Pollack estimates that the holdouts’ claim, including accrued interest, now amounts to 400% of the principal, a figure which equates to $9 billion. The holdouts have disdained discounted offers from Argentina in the past, and would presumably turn their noses up at 150%.

But Argentina has worked hard in recent weeks to strengthen its negotiating hand. After meeting Mr Prat-Gay on January 21st in Davos, Jack Lew, America’s treasury secretary, pledged that the United States would no longer oppose lending to Argentina at the World Bank and Inter-American Development Bank. Argentina has also persuaded private banks to lend it money. On January 29th Argentina’s central bank announced that it had secured a $5 billion bridging loan from a group of international banks, including HSBC, JPMorgan Chase and Santander.

That eases the immediate pressure on Argentina. But Mr Macri’s political programme still hinges on a return to international capital markets. Argentina’s fiscal deficit is an estimated 7% of GDP. The government will need $30 billion in financing this year, according to Miguel Kiguel, director of EconViews, a local consultancy. The central bank, for its part, has only $30 billion of foreign-exchange reserves. “Argentina is in a race against time,” he says. “It would be very difficult to raise that kind of money in Argentina.”

Any deal with holdout creditors will have to be approved by Congress, where Mr Macri’s party is in a minority. It will take skill to sell an accord to opposition politicians who have spent years resisting a compromise with “vulture funds” like Elliott Management, which bought the debt in question at a hefty discount.

During the first round of restructuring in 2005 Argentina introduced the “Ley Cerrojo” (Padlock Law) which was intended to prevent negotiations from being re-opened at a later date. It was suspended for a year to enable a second restructuring in 2010, but remains on the books. The law under which Argentina attempted to steer money to the holders of the restructured bonds could also impede the ratification of any new deal. “Congress will have to repeal them,” says Mr Kiguel.

Many Argentines dislike the idea of rewarding the holdouts for their obstinacy. But Mr Macri may like the idea of a distracting feud with them even less.