Argentina Bond Losses Feel Like Gains as Debt Talks Stall

Argentina’s bondholders are starting to lose confidence the nation’s default last month will be resolved anytime soon. That may be just what prods the government into pursuing a solution.

A slump in dollar-denominated notes has pushed up yields in four of the past five days to an eight-week high of 9.98 percent, data compiled by JPMorgan Chase & Co. show. Argentina’s unwillingness to assure payment on a third-party deal has slowed talks aimed at resolving a decade-long dispute with unpaid creditors from its 2001 debt crisis, according to a person briefed on the discussions, who asked not to be identified because the talks are private.

While Argentina isn’t opposed to a settlement that compensates the holdouts and enables the nation to resume payments to current bondholders, Economy Minister Axel Kicillof said last week the government can’t get involved in those negotiations. Now, the prospect of deepening losses boosts the likelihood that investors will demand immediate repayment on as much as $30 billion of bonds and increases the urgency for Argentina to settle, Maglan Capital LP said.

“Things need to continue to ratchet up in order to be the catalyst for an eventual settlement,” David Tawil, the co-founder of New York-based hedge fund Maglan Capital, which doesn’t own Argentine government bonds, said by telephone. “At that point Argentina finally listens to the gospel and says ‘Yes, you know what, we really do have to pay on this.’”

Payment Blocked

Jesica Rey, a spokeswoman at the Economy Ministry, didn’t respond to an e-mail or telephone call seeking comment on the third-party negotiations.

Argentina was blocked from making a $539 million interest payment by a U.S. court order that stems from a lawsuit brought by hedge funds led by billionaire Paul Singer’s Elliott Management Corp, triggering a default on the country’s foreign bonds. Those hedge funds had refused to accept new bonds worth about 30 cents on the dollar in restructurings in 2005 and 2010 and instead sued for full repayment and won.

Until Argentina pays them or reaches a settlement, the nation can’t pay interest on any of its overseas debt.

The nation has refused to pay the $1.5 billion the holdouts won from the court ruling and says it can’t settle without exposing itself to an additional $120 billion in claims from other investors who also may demand sweeter terms.

Debt Talks

A group of international banks, including Citigroup Inc. and JPMorgan have participated in talks with Argentine investors to buy holdouts’ debt claims. A stumbling block in reaching a deal is that there’s no guarantee from the government it will repay them once the bond clause restricting it from offering better restructuring terms expires at the end of the year, according to the person familiar with the talks.

Aurelius Capital Management LP, another hedge fund that was part of the lawsuit with Elliott, said yesterday that after holding talks with private parties, there’s “no realistic prospect” of reaching a solution.

“No proposal we received was remotely acceptable,” the New York-based firm said in a statement. “And no proposal made by us received a productive response.”

Elliott spokesman Stephen Spruiell didn’t respond to a telephone call seeking comment on the status of the talks.

JPMorgan spokeswoman Veronica Espinosa declined to comment on the talks. A Citigroup press official also declined to comment.

Argentina’s peso was little changed today at 8.2768 per dollar as of 2:16 p.m. in New York.

Optimism Fading

Holders of Argentina’s restructured foreign-currency bonds issued overseas can demand immediate repayment by invoking what’s known as a cross-default provision.

Under the terms, Argentina would have to pay the entire balance -- plus unpaid interest -- if holders of at least 25 percent of a bond series demand their money back.

As optimism of a settlement fades, the risk increases that investors will opt to accelerate payment on their bonds and press for a restructuring, Morgan Stanley said Aug. 5.

“Some acceleration might be desirable for Elliott, since it would increase the pressure on the country to get out of default,” Alejo Czerwonko, a strategist at UBS Wealth Management’s chief investment office, said in an e-mail. “Even acceleration ‘talk’ or acceleration that winds up being decelerated could help Elliott.”

Acceleration still carries risks because too many creditor claims may overwhelm Argentina and reduce the ability of the holdouts to get their money first, according to Constellation Capital Management LLC, a New York-based hedge fund.

Chicken Game

“What is the benefit of playing this game of chicken?” Shahriar Shahida, co-founder of Constellation Capital, which holds the restructured bonds, said by phone. “What do the holdouts stand to gain if they inadvertently cause a group to come and accelerate and essentially get Argentina to a point where they have to give a seat to everybody else?”

Anna Gelpern, a fellow at the Peterson Institute for International Economics, says Argentina hasn’t responded to market-based incentives to negotiate and probably won’t start now.

“That has certainly been the calculus of the court system, that there’s an externally imposed pain threshold that affects government incentives,” she said by telephone from Washington. “That may not be in play here.”

Argentina is more likely to be swayed to strike a deal by signs the economy is being hurt by the default, said Fernando Losada, a Latin America economist at AllianceBernstein LP.

Black Market

Argentines themselves will look to bond prices as an indication of confidence in a resolution, and they “may start losing faith in the official narrative emphasizing prospects of domestic stability” if prices fall below 70 cents, JPMorgan wrote in a note on July 31.

Yesterday, the peso in the black market fell to a record 13.15 per dollar after the central bank cut interest rates at its note auction for the first time since May, according to Credit Suisse Group AG. As rates drop, demand for dollars may increase and pressure foreign reserves, Casey Reckman, an economist at Credit Suisse, said in a report yesterday.

“It’s important to monitor the evolution of the local economy to determine whether new incentives to settle do appear,” AllianceBernstein’s Losada said in an e-mail. “Pressures on deposits or further deterioration in business confidence and in economic activity could prompt the government to negotiate with creditors.”

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