Accords with the World Bank, Repsol SA and now the Paris Club have put Argentina on the cusp of returning to international bond markets. The country has left the toughest deal for last.
After a 20-hour meeting with officials from the Paris-based group of creditor nations, which kept President Cristina Fernandez de Kirchner awake until 2 a.m., Argentina said yesterday that it agreed to pay $9.7 billion over five years to settle claims stretching back to the government’s record $95 billion default in 2001. South America’s second-biggest economy hasn’t issued bonds in international markets since it stopped payments.
Solving the remaining dispute with holdout creditors including billionaire Paul Singer’s Elliott Management Corp. is becoming more urgent with foreign-exchange reserves stuck near an eight-year low. Argentina needs the money to fund investment, defend its currency and make payments on restructured bonds, while any proceeds from a U.S. bond sale could be seized by creditors backed by court orders saying they’re owed billions.
“It’s clearly positive that Argentina finally resolved this issue” with the Paris Club, said Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management in New York. “The big obstacle to tackle is still the holdouts.”
Before reaching the Paris Club accord, Argentina also settled claims with five companies in the World Bank arbitration arm, improved economic data reporting at the request of the International Monetary fund and compensated Spanish oil company Repsol for the seizure of YPF SA two years ago.
Since succeeding her late husband as president, Fernandez has imposed the harshest currency controls since the aftermath of the 2001 financial crisis and nationalized $24 billion in pensions and the country’s flagship airline Aerolineas Argentinas SA.
The extra yield investors demand to own Argentine bonds over U.S. Treasuries, at 8.27 percentage points, is the highest in emerging markets after Venezuela. The so-called spread narrowed four basis points at 11:28 a.m. in Buenos Aires.
About 93 percent of creditors accepted losses of 70 cents on the dollar in the country’s 2005 and 2010 debt restructurings, while other holdout investors, including Elliott, sued for better terms.
“There’s just 7 percent of creditors left who haven’t voluntarily restructured their debt, and of that 7 percent there’s 1 percent that are vulture funds that have promoted lawsuits in the U.S.,” Cabinet Chief Jorge Capitanich said yesterday during a press conference in Buenos Aires. “We have a final step so that either via the judicial system or voluntary agreement we can end this process of restructuring our debt.”
Fernandez called the holdout hedge funds “serial predators” during a speech yesterday.
In a bid to enforce $1.7 billion in court judgments Argentina refuses to pay, Singer in March sued the country and Elon Musk’s Space Exploration Technologies Corp. for rights to two launch-services contracts owned by the South American nation and in 2012 tried seizing a naval vessel docked in Ghana.
The hedge fund also has a case against the nation before the U.S. Supreme Court. The court justices may decide as soon as next month whether to review lower court orders requiring Argentina to pay holdouts in full when it makes payments on restructured bonds.
Argentina said in a May 27 filing it would require $15 billion to pay all holdouts.
“Like its obligations to the Paris Club, Argentina has had obligations to private creditors outstanding for over a decade,” Jay Newman, a senior money manager at Elliott, said in an e-mail. “Argentina should finally sit down and negotiate with its private creditors, who stand ready to reach a good-faith resolution.”
Without an accord with the holdouts, it’s too costly for Argentina to issue bonds abroad, according to Vladimir Werning, head of Latin America research at JPMorgan Chase & Co.
“The political embarrassment of locking in current double-digit yields remains a constraint for the sovereign to issue,” Werning said in a telephone interview from New York. “The main hurdle before the government would actually embrace market access is the private creditor holdout problem.”
Argentine bonds have slid 1.5 percent this month, pushing their average yield to 10.9 percent as investors shift away from the country’s securities before the U.S. Supreme Court decision, which could cause a default.
That comes after a rally that’s handed investors returns of 40 percent over the past year as Argentina improved relations with international investors and took steps to improve its economic imbalances.
Yesterday the country’s bonds due in 2033 jumped more than 1 cent on the dollar to 77.75, the first increase in 10 trading days and the most in three weeks.
The accord with the Paris Club was largely reflected in bond prices before the announcement, according to Mauro Roca, a senior Latin America economist at Goldman Sachs Group Inc.
“It’s not a game-changer,” Roca said in a telephone interview from New York. “It doesn’t mean that Argentina can now return to markets. This will happen once the holdouts issue is resolved.”
The Paris Club agreement will also diminish reserves as the country relies on them to make payments, Roca said. That may be partly offset by inflows from credit lines. The accord allows Paris Club members’ export credit agencies to resume lending to Argentina, the group said in a statement.
The agreement with the Paris Club may also help shore up swap lines with other countries’ central banks, JPMorgan’s Werning said.
Moody’s Investors Service, which cut the country’s credit rating to seven levels below investment grade in March, won’t upgrade it from Caa1 until those inflows have materialized, said Gabriel Torres, an analyst at the company.
“We’re not incorporating this as a positive until we hear about more money coming in,” Torres said in a telephone interview from New York. “But at the very least this hangover is gone.”
Argentina still needs to improve its fiscal accounts, curb inflation and boost reserves for a credit upgrade, Shelly Shetty, the head of Latin American Sovereigns at Fitch Ratings Ltd., said in a telephone interview from New York.
Last year, Argentina’s central bank reserves fell $12.7 billion.
Plans to issue debt will depend on needs to finance specific development projects, Argentine Economy Minister Axel Kicillof said yesterday.
“No one can live just off cash,” Kicillof said.