Argentine Debt Talks to Resume as Default Deadline Looms

By Katia Porzecanski, Daniel Cancel and Jenna M. Dagenhart

Photographer: Don Emmert/AFP/Getty Images

Axel Kicillof, Argentina's minister of economy, speaks to the media in New York.

Argentina said it will resume talks aimed at avoiding a default today after 12 hours of meetings at the office of a court-appointed mediator failed to produce a deal that would allow it to make interest payments.
Economy Minister Axel Kicillof, speaking at 11:20 p.m. yesterday after exiting mediator Daniel Pollack’s office in Manhattan, said the parties agreed to a pause in the discussions. Government officials met face-to-face with representatives of hedge funds that successfully sued the country for full repayment of $1.5 billion on debt still owed from a default in 2001, Pollack said in an e-mail.
“We’re taking a break,” Kicillof told reporters. “Since it’s still an ongoing meeting, I can’t give details about the content.”

Any default by Argentina could trigger bondholder claims of as much as $29 billion, equal to the nation’s foreign-currency reserves. The economy, already headed for its first annual contraction since 2002 amid 40 percent inflation, may shrink by an additional 5 percent in a default scenario as Argentines scrambling for dollars cause the peso to weaken and activity to slump, according to Bank of America Corp.
To avoid another default before today’s deadline for an interest payment expires, President Cristina Fernandez de Kirchner must reach a deal to settle the suit, compensate the hedge funds in full or obtain a delay on the U.S. court ruling that forbids her from servicing any debt before paying the holdout creditors. The country hasn’t been able to access international credit markets since its $95 billion default 13 years ago, and foreign reserves used to pay debt are near an eight-year low. Argentina devalued its peso in January.

Banks Proposal

“There was a frank exchange of views and concerns,” Pollack said in the statement. “The issues that divide the parties remain unresolved. Whether and when the parties will meet” again will be determined overnight, he wrote.
U.S. District Court Judge Thomas Griesa blocked a $539 million payment to bondholders last month because the nation didn’t also include funds for the holdouts. The investors declined to accept offers of about 30 cents on the dollar during two restructurings following the country’s 2001 default, deciding to take their claims to court instead.
A group of local Argentine banks has drafted a proposal to purchase the claims owned by holdout creditors, according to an official at Banco Macro SA who asked not to be identified because the information is private. The bank’s president, Jorge Brito, is the head of the ADEBA bank association.

Stock Rally

An official from a local bank traveled to New York today to present the plan to holdout creditors including Elliott Management Corp. during meetings with the mediator and government delegation, the person said. The proposal was reported earlier by television channel CN23.
The Economy Ministry didn’t immediately reply to an e-mail seeking comment.
Argentina’s restructured bonds due in 2033, which had their interest payments blocked, rallied to a three-year high of about 94 cents on the dollar earlier this month on speculation a deal with the holdouts would be reached. They traded at 85.26 cents as of 9:31 a.m. in London.
The benchmark Merval (MERVAL) stock index jumped 6.5 percent yesterday, after earlier losing as much as 1.1 percent, to close at the highest since June 23. The notes due 2033 rose 1.6 cent to 85.47 cents on the dollar, reversing earlier losses as the talks continued in New York. Its currency, the peso, has weakened 20 percent this year.

RUFO Clause

Fernandez has taken steps to restore Argentina’s standing with investors so it can return to international capital markets. In the past year, the country has settled arbitration cases at the World Bank, agreed to pay $9.7 billion to the Paris Club of creditors and compensated Repsol SA for the takeover of its local unit with $5 billion of bonds.
The dispute with holdout creditors came to a head on June 16 when the U.S. Supreme Court declined to hear Argentina’s appeal in the case, exhausting its legal options in U.S. courts.
The government says it needs a delay of the ruling until the Rights Upon Future Offers clause expires on Dec. 31, after which it will be able to negotiate. The so-called RUFO clause in the restructured bond contracts prohibits the government from making a better offer to holders of defaulted debt than was given to investors who accepted earlier restructurings.

Selective Default

Fernandez said yesterday in Caracas that the holdouts, whom she calls “vulture funds,” should accept the same terms and accused Griesa of bias.
“Argentina won’t default, because Argentina paid,” Fernandez said, referring to the blocked debt payment.
The government’s payment capacity “should not be taken for granted” if it defaults, Marcos Buscaglia, chief Latin America economist at Bank of America, said in a research note yesterday. Weak fiscal, monetary and external conditions make the probability of the “situation spinning out control quite high,” he wrote.
Standard & Poor’s would place Argentina under selective default as soon as tonight if bondholders don’t receive their interest payment, analyst Delfina Cavanagh said yesterday in a telephone interview from Buenos Aires.
“If by the end of the 30th, Argentina doesn’t pay the interest due on its discount bonds, we’d place it in selective default right away,” Cavanagh said. “We’re looking at whether creditors have received their payments, regardless of legal impediments.”