Overseas bankers attempt to resolve Argentina’s debt impasse

Foreign bankers are in Buenos Aires for talks aimed at resolving Argentina’s debt impasse with a group of creditors that forced the country into a new default last week.

According to local financial daily Ámbito Financiero, executives from Citibank, HSBC and JP Morgan are in discussions with local institutions over buying bonds in the hands of holdouts who rejected a 2005 restructuring of debt the country defaulted on in 2001.

Last week’s default followed the government refusal’s to offer the holdouts better terms than the 2005 deal, even after they won a ruling in the US that prevents Buenos Aires servicing bonds issued as part of the restructuring unless they received $1.5 billion (€1.12 billion) in full payment for their paper.

‘Vulture funds’

The reported plan would see a group of banks pay the holdouts par value plus interest – a huge return on an initial investment made just after the 2001 default when the bonds were snapped up at pennies on the dollar. Paying off the hedge funds would remove from Argentina’s debt equation a group of creditors the government in Buenos Aires labels “vulture funds” and with which it says it will never negotiate again, threatening to extend indefinitely the country’s exile from capital markets.

Once in possession of the bonds, the new owners would then drop the lawsuit in the US allowing Argentina to exit last week’s default. The bonds could then be renegotiated after the expiration in December of a “rights upon future offers” (rufo) clause in Argentina’s restructured debt, which obliges the government to extend any improved deal for holdouts to those who accepted a restructuring deal in 2005. In order not to trigger the clause, the government has played no part in the talks, meaning those buying bonds from the holdouts will do so without a guarantee that they will recover all of the money invested.

Financial sense

Even so, analysts say a deal makes sense. “There is no free lunch. If the banks do this, it is because they think they will make money. They would lose it on the bonds they buy from the holdouts but they would make it up on bonds they already hold. A deal would spark a strong enough compression of yields on these bonds to make the maths work,” said Alberto Bernal, a Latin America economist at bond trader Bulltick.

Rumours of a solution have helped markets remain relatively calm with no rout of Argentine bonds as they price in a quick exit from default.

The government, meanwhile, kept up its war of words over the weekend against US judge Thomas Griesa and is now saying it will take its case against the holdouts to the International Court of Justice in The Hague, though local jurists warn there is no chance the tribunal will take up the case.

The government is also reportedly studying new measures to reduce the inflow of imports in order to prevent further erosion of the country’s dwindling foreign reserves. In recent years, it has erected a series of bureaucratic barriers against foreign goods which must be paid for in dollars, hitting trade with regional partners, especially Brazil.