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Argentina Will Repay Paris Club Debt 13 Years After Default

Argentine President Cristina Fernandez de Kirchner
President Cristina Fernandez de Kirchner, who last year created a debt restructuring unit headed by former Economy Minister Hernan Lorenzino, is battling holders of defaulted bonds in U.S. courts while trying to satisfy International Monetary Fund demands to improve the accuracy of official economic data. Photographer: Juan Mabromata/AFP/Getty Images

Argentina, locked out of overseas markets since its record $95 billion default in 2001, took another step toward a return to selling international bonds by agreeing to repay its debt to the Paris Club.

The government will pay arrears that amounted to $9.7 billion at the end of April over a five-year period, according to an e-mailed statement from Paris Club, a group of creditor nations including Japan, the U.S., Germany and France,.

The agreement “is a significant positive event in terms of sentiment for Argentine credit,” Sergey Dergachev, who helps oversee about $10 billion in emerging-market debt at Union Investment Privatfonds GmbH in Frankfurt, said by e-mail. “It marks clearly that the relationship between Argentina and the international financial community has improved.”

President Cristina Fernandez de Kirchner, who succeeded her late husband, is seeking to resolve disputes with creditors in a bid to bolster foreign reserves that tumbled 27 percent in the past year and avoid a balance-of-payments crisis. The country is still battling holders of defaulted bonds in U.S. courts, while trying to satisfy International Monetary Fund demands to improve the accuracy of official economic data.

The first payment of a minimum $1.15 billion will be settled by May 2015 and another will be due a year later, the Paris Club said. The Argentine Economy Ministry said in a statement that it will make an initial capital payment of $650 million in July and $500 million in May 2015.

Interest Rates

The extra yield investors demand to hold Argentine debt over U.S. Treasuries narrowed 0.07 percentage point to 8.43 percentage points at 1:23 p.m. in New York, according to data compiled by JPMorgan Chase & Co.

“Today Argentina is on the path to regularizing and paying for the broken plates that 40 years of neoliberalism left us,” Argentine Economy Minister Axel Kicillof said in an interview on Radio Continental.

The interest rate the Paris Club charges on Argentina’s debt will fall to 3 percent if repayment is made within five years, down from 7 percent, Kicillof said. Argentina will pay a maximum of 3.8 percent for repayment within seven years, he said.

The Paris-based group of creditors invited Argentina to negotiate after it received a revised repayment proposal, club spokeswoman Clotilde L’Angevin said March 14. Kicillof traveled to France on Jan. 22 to present an initial proposal.

Debt Plans

The payments are a “necessary and important step for the normalization of financial relationships,” the group said in the statement. The accord may also allow export credit agencies of Paris Club members to resume their export-credit activities, it said.

“By reaching this agreement, export credit agencies are now open for business in Argentina, which could be good news for European exporters,” Richard Segal, a strategist at Jefferies International Ltd. in London, said by e-mail.

While settling its debt with the Paris Club paves the way for Argentina to return to international credit markets, the country has no immediate plans to issue debt, Kicillof said. That will depend on needs to finance specific development projects, he said.

“No one can live just off cash,” he said.

Argentina’s dollar bonds have returned 36 percent over the past year as Fernandez moved to improve relations with international investors. On average, emerging-market government debt has returned 3.3 percent over the period, JPMorgan index data show.

Arbitration Claims

The peso has weakened 35 percent in the span, as the government undertook the biggest devaluation since 2002.

Argentina settled $677 million of arbitration claims last year and held talks with the IMF on overhauling its statistics. It unveiled a new inflation index on Feb. 13 that showed prices rising about three times as much as previously reported after the IMF censured the nation.

Earlier this month, Fernandez gave Repsol SA $5.3 billion of bonds as compensation for the 2012 expropriation of energy producer YPF SA. Argentina is willing to resolve “inherited debt” from previous governments and was about to pay the Paris Club in 2008 before the collapse of Lehman Brothers Holdings Inc., Kicillof said Jan. 21.

The government is locked in a dispute with holders of defaulted bonds, including hedge fund manager Paul Singer, in a case before the U.S. Supreme Court.

“We have a final step so that either via the judicial system or voluntary agreement we can end this process of restructuring our debt,” Cabinet Chief Jorge Capitanich said today during a press conference in Buenos Aires.

Repayment Capacity

The origin of the Paris Club dates back to 1956 when Argentina first met its public creditors in Paris. Since then, the grouping has reached 429 agreements with 90 different debtor countries. Since 1956, the total debt of club agreements has amounted to $573 billion.

The country’s foreign-currency debt is rated eight steps below investment grade by Fitch Ratings Ltd. While credit positive, the deal alone isn’t sufficient to warrant an upgrade, Shelly Shetty, head of Latin American sovereign ratings at the company.

“We have to look at the debt-repayment capacity and that still depends on the outlook and the trajectory of international reserves,” Shetty said in a telephone interview from New York. “The question is will these measures be enough to boost confidence, stem capital flight, and give them more access to financing.”

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