This Is Why Argentina's Scioli Would Settle Debt Conflict First

  • Scioli to seek gradual changes and will need market access
  • Opposition's Macri sees immediate lifting of currency controls

Bond investors have long believed Mauricio Macri to be the presidential candidate in Argentina who will make ending the nation’s decade-long legal dispute with creditors a priority. With the election just three weeks away, they may want to reconsider.

Macri, the leading opposition contender, is pledging to restore Argentina’s finances by jettisoning currency controls and cutting subsidies that have swelled the budget deficit to a 14-year high. According to Macri’s own adviser, Federico Sturzenegger, those priorities will make striking a deal with hedge-fund foes led by Paul Singer’s Elliott Management less urgent.

By contrast, Daniel Scioli, the front-runner in polls, will seek to finance the deficit by regaining access to overseas debt markets, rather than making wholesale changes to many of the policies implemented by President Cristina Fernandez de Kirchner, according to former central bank Governor Mario Blejer, a Scioli adviser. That will make reaching an accord with the likes of Singer a priority.

Fernandez’s refusal to abide by a U.S. court ruling requiring Argentina to repay disgruntled creditors led to the nation’s second default in 13 years.

“He’ll be forced to negotiate sooner,” Luis Caputo, the president of Axis Inversiones, a money manager that owns Argentina debt, said from Buenos Aires. “This is more about logic than ideology.”

Argentina hasn’t sold debt under international law since it defaulted on a record $95 billion in 2001. Creditors including Singer rejected the government’s debt restructuring deals in 2005 and 2010 and won the right to full repayment in U.S. courts.

‘Social Constraints’

U.S. District Judge Thomas Griesa has blocked the country from honoring its foreign debt until the government reaches a settlement with the so-called holdouts. Fernandez calls the investors “vultures” and has refused to comply with the ruling, triggering another default in 2014.

Scioli and Macri have both indicated they’d hold talks to end the debt dispute. That’s helped spark a 19 percent gain in Argentina’s foreign bonds in the past year, the biggest in emerging markets, according to data compiled by JPMorgan Chase & Co. Government notes due 2033 which fell into default last year are trading at 102.34 cents on the dollar.

The winner of the Oct. 25 election will inherit a budget deficit of about 7 percent and foreign reserves hovering near a nine-year low.

“Scioli believes that you cannot fully correct the deficit given the political, social, economic and financial constraints,” Blejer, who is now vice president of Banco Hipotecario, said in an interview at his office in Buenos Aires. “This makes it extremely important to solve the problem of the holdouts because if you can’t close the deficit quick, you need to finance it in a way that is not damaging.”

‘Negotiate Firmly’

Scioli said Wednesday that the conflict with creditors has held Argentina back from progressing. Jorge Telerman, Scioli’s campaign manager, didn’t respond to an e-mail seeking comment.

“We’re going to have the willingness to negotiate firmly, with tenacity and open to, in fair and equal terms, finalizing something that has conditioned Argentina,” Scioli said at an event with business executives in Buenos Aires.

Macri is betting that his victory will stoke foreign investment in Argentina, which would help boost the country’s reserves, Sturzenegger, who’s a member of Congress, said in an interview at Bloomberg’s offices in Buenos Aires. By reforming Argentina’s institutions and reducing the risk of investing in the country, Macri can help state-run companies such as oil company YPF SA obtain lower borrowing costs, he said.

Lower Incentive

The oil and gas producer, seized from Repsol SA by Fernandez in April 2012, saw yields on its $1.5 billion of notes due 2025 climb to a record 10.77 percent last month before falling to 9.65 percent Wednesday.

The government’s foreign-exchange controls have also spawned myriad illegal currency as Argentines favor dollars in a country where inflation exceeds 25 percent.

“If Macri does his institutional shock, unifies the exchange-rate market, the yield of YPF bonds comes down from 11 percent to 5 percent,” Sturzenegger said. “Then the incentive as a government to solve the holdouts problem is lower because you have financial means of your own.”

Ivan Pavlovsky, Macri’s spokesman, didn’t return a voicemail seeking comment on what Sturzenegger said about creditor negotiations.

Stephen Spruiell, a spokesman at Elliott Management, declined to comment.

To Jefferies Group LLC’s Siobhan Morden, Scioli would have to do more than just end the debt impasse for Argentina to regain access to overseas credit markets. The country will still find it hard to get financing as long as it’s dependent on commodity revenue and refuses to devalue the peso, she said.

“Debt issuance alone is not a strategy,” Morden, the head of Latin America fixed income strategy at Jefferies, said in an e-mail.

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