Oct. 16 (Bloomberg) -- Holders of $20 billion of defaulted Argentine bonds have no chance of negotiating a settlement with the government that gives them better terms than those of a 2005 restructuring, former Economy Minister Roberto Lavagna said.

The conditions of the swap four years ago stipulate that any subsequent offer should be less favorable for bondholders, said Lavagna, who managed the exchange that gave creditors about 30 cents on the dollar. About 25 percent of creditors rejected the offer.

“As far as bondholders are concerned, the first thing they should do is recognize that that is how things are,” Lavagna, 67, said in a telephone interview from Buenos Aires. “If not, there can’t be any accord. This is an error the bondholders, or those who represent them, are committing.”

The government of President Cristina Fernandez de Kirchner has said it was negotiating terms of an agreement in order to regain access to international capital markets that it lost after defaulting on $95 billion of debt in 2001. Economy Minister Amado Boudou told reporters in Buenos Aires on Sept. 21 that the government was talking with investors in search of a “definitive strategy” for the defaulted debt.

“There’s a lot of confusion within the government: some days it says one thing, and other days it says something different,” said Lavagna. “No technical work has been done that would enable them to make a possible offer.”

Lavagna, a former ambassador to the European Union, was named economy minister by former President Eduardo Duhalde in April 2002, three months after the country abandoned a one-to- one peso peg to the dollar. Fernandez’s husband and predecessor Nestor Kirchner, who took office in May 2003, ousted Lavagna in November 2005 over disagreements on how to stem inflation.

‘Normalizing’ Relationship

Argentina’s 2010 budget bill states the government plans “to continue to advance with the process of normalizing” its relationship with creditors, including the holdouts from the 2005 restructuring.

A debt restructuring may “improve the outlook” on the country’s B3 foreign debt rating, which is six levels below investment grade, said Moody’s Investors Service on Oct. 8. The country’s defaulted bonds traded at around 40 cents on the dollar yesterday, up from 15 cents in June, according to Amir Zada, an associate director at London-based Exotix Ltd., a brokerage that specializes in distressed securities.

The extra yield investors demand to own Argentina’s performing dollar bonds instead of U.S. Treasuries narrowed to 6.98 percentage points from 9.62 points on July 31 as an easing in the global recession spurred demand for higher-yielding assets, according to JPMorgan Chase & Co. The gap touched 6.63 percentage points on Oct. 9, the smallest in 14 months.

Argentina’s economy will contract as much as 3 percent this year as a result of a high inflation rate and a drop in the rate of investment, which fell to 14 percent of gross domestic product from about 24 percent in 2005 and 2006, Lavagna said. The economy will resume growth next year, expanding between 2 percent and 3 percent, he said.

To contact the reporter on this story: Eliana Raszewski in Buenos Aires at eraszewski@bloomberg.net

Last Updated: October 16, 2009 09:29 EDT