New Year Won't End Argentina Bond Mess

The end of the RUFO clause is promising. But hold the Malbec.

She will not deliver you from bondage.

Photographer: Alejandro Pagni/AFP/Getty Images

Argentina would love to forget 2014; the new year now gives the country some reason to celebrate. At the stroke of midnight, Dec. 31, a vexing pay-one, pay-all clause that has kept the South American debtor at knife point with aggressive bond holders expired, so clearing the way for a fresh start to settling one of the nastiest sovereign debt disputes on record.

In theory, at least. The end of the rights-upon-future-offers (RUFO) clause offers all combatants a face-saving way out of a financial labyrinth that might have been concocted by Argentine fabulist Julio Cortazar and has ensnared relations between borrowers and lenders well beyond the River Plate. Released from RUFO’s leonine grip, Argentina may now strike a deal with a cranky minority of insurgent creditors without incurring a flood of cross-claims of the 92 percent of creditors demanding equal treatment.

But hold the Malbec. For those counting on a quick patch-up between the government of President Cristina Fernandez de Kirchner and the rapine holdout funds, led by NML Capital Ltd., the hedge fund controlled by billionaire Paul Singer, the wind kicking up from the pampas is less than caressing.

Vulture Investing

Nursing an injured ankle, Kirchner stayed away from the balcony, bidding her compatriots a happy new year instead on Twitter from home in southern Argentina, where she posted snapshots with her toy poodle Lolita. Any resemblance to Evita Peron, Argentina’s storied princess of the “shirtless,” who defied the elite and kept the rest of the country in her lap, was no coincidence. The smiling portrait was a sunny answer “to those who predicted disaster in December,” she said.

Finance minister Axel Kicillof made the point more directly. “We are not crawling through the desert in search of every last dollar,” he said last month, even as the credit-starved country tried and failed to flog sovereign bonds. Apparently, not even the double-digit return offered by Argentina  attracted investors.

You wouldn’t know from the two-fisted rhetoric out of Buenos Aires that Argentina is in dire shape. Inflation is soaring, the economy slipped into recession last quarter, and prices for soybeans, the country’s leading commodity, are sliding. A pariah in the credit market, the country has relied on government intervention and an $11 billion loan from China to halt the peso’s toboggan slide against the dollar and slow the hemorrhage in hard currency reserves.

The end of the RUFO clause could just restore some sanity to debt discussions and coax both sides back to the negotiating table. Still, there’s no guarantee that truce will lead to diplomacy. Kirchner built her government largely on trickle-down populism to win the crowd and, when the economy faltered, shifted the blame, Evita-like, to opposition fat cats and their handmaidens in the contrarian media. The war against the rebel investors -- vulture funds, in Kirchnerese -- was part of the script and may be too good to jettison with the RUFO clause.

The best bet for relief in South America’s most debt-locked economy is Oct. 25, when Argentines will vote for a new president. Until then, watch for vultures to flock and more selfies with Lolita.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.