There was no mystery about the top item on newly elected Argentine President Mauricio Macri’s to-do list as he prepared to take office on Dec. 10: make peace with the nation’s disgruntled creditors.
Macri, the center-right former mayor of Buenos Aires, won the presidency on Nov. 22, pledging to revive South America’s second-biggest economy. Among the problems: a recession, rampant inflation, a growing deficit, and falling foreign reserves. To address any of those challenges, he’ll have to resolve a 14-year-old standoff with U.S. hedge funds holding defaulted Argentine bonds, an impasse that’s made the nation a pariah in international credit markets. A settlement with holdout creditors offers the only path for Argentina to borrow the money it needs to repair the economy and finance development. “If Macri doesn’t get this done, he can’t do anything,” says Alberto Bernal, chief emerging-markets and global strategist at XP Securities.
The incoming finance secretary, Luis Caputo, has told the court-appointed mediator that the government wants to begin settlement negotiations with the holdouts promptly. But to reach a deal, Macri has to overcome legal, political, and economic hurdles, many of them set up by his Peronist predecessors: Cristina Fernández de Kirchner, who demonized the hedge funds as “vultures,” and Néstor Kirchner, her late husband, who served as president from May 2003 to December 2007. Macri will have to go to Congress to undo laws limiting the government’s freedom to make a deal. He’ll have to make things right with holders of Argentina’s restructured debt, which the country stopped paying in 2014. And he may have to issue tens of billions of dollars in new debt to finance a settlement. A lawyer representing the government declined to comment.
Argentina defaulted on $95 billion in foreign debt at the end of 2001. After talks with creditors stalled, the nation faced lawsuits from bondholders seeking payment in federal court in New York, where a clause in the bond contracts allowed most of them to sue. Judge Thomas Griesa found in favor of the creditors, routinely handing out money judgments that the bondholders unsuccessfully struggled to enforce. In 2005 and 2010, Argentina offered to exchange new bonds for the ones it had repudiated. Eventually the country succeeded in restructuring about 93 percent of the defaulted debt at roughly 30¢ on each dollar of what it originally owed.
But hedge funds such as Aurelius Capital Management and NML Capital, a unit of Paul Singer’s Elliott Management, bet they could get a better deal. A legal breakthrough came in 2012, when Griesa sided with the hedge funds and ruled that Argentina can’t make any new payments on the restructured debt before it pays an estimated $1.8 billion to a group of holdouts including NML. A spokesman for Elliott declined to comment.
Unwilling to pay and unable to find a way around Griesa’s rulings, Argentina began defaulting on about $30 billion of restructured debt in July 2014. In October, Griesa extended his ruling to the holders of an additional $6.1 billion in defaulted debt, increasing the pressure on Argentina to settle.
For Macri, the political hurdle may be the most difficult one. He’ll need Congress, where his party is in the minority, to repeal the law prohibiting officials from giving the holdouts better terms than were offered in the 2005 and 2010 debt swaps. To sell a deal domestically, he’ll have to overcome years of the Kirchners’ harsh rhetoric portraying the vulture funds as a threat to Argentina’s sovereignty and dignity.
Macri will also have to establish credibility in U.S. courts, where an appeals panel last year called Argentina “a uniquely recalcitrant debtor.” Daniel Chodos, an emerging-markets strategist at Credit Suisse Group, estimates Argentina will have to issue as much as $20 billion in debt to pay the holdouts and make back payments on the restructured debt. A deal could come in the first half of 2016, he says, and it will have to be structured in a way that avoids flooding the market with new Argentine bonds.
Griesa, who has frequently urged both sides to find a solution, may help push along a settlement by freeing the restructured bond payments once Macri gets most of the holdouts on board. Investors have driven up the prices of Argentine bonds by more than 5 percent in the past three months, betting that Macri will achieve a settlement. They’ve got one very good reason: He doesn’t have any real alternative.
The bottom line: Unresolved disputes stemming from Argentina’s $95 billion default could handcuff the new president’s economic plans.