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Argentina’s willingness to end a gruelling legal dispute with a group of US hedge funds will be put to the test when a key clause in debt contracts expires on December 31.
The government has long insisted that the “rights upon future offers” (Rufo) clause in the contracts of bonds issued in 2005 and 2010 following Argentina’s 2001 default prevented it from paying its “holdout” creditors in full.
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Its failure to make those payments in full by a July deadline, after the holdouts won a lawsuit against Argentina in the US, pushed the country into default for the eighth time in its history.
But despite the imminent removal of the apparent barrier that stopped Argentina from paying the hedge funds led by US billionaire Paul Singer’s NML Capital any more than the holders of its restructured bonds, analysts are sceptical that there will be any deal before President Cristina Fernández leaves power in December 2015.
“We will see whether Rufo was real or a red herring on January 1, but we think this government remains ideologically opposed to settling and is not prepared to pay the political cost of reaching a deal,” says Stuart Culverhouse, chief economist at Exotix, a London-based frontier market debt specialist.
Although a settlement would unblock Argentina’s access to the international capital markets and alleviate a severe shortage of dollars, Mr Culverhouse says that if Ms Fernández can avoid an economic crisis before presidential elections in October, she will try to pass the holdouts problem on to the next government.
If so, markets expect a new president — who would likely inherit an economy in recession as it struggles against a dollar drought, a gaping fiscal deficit and one of the highest inflation rates in the world — to then settle swiftly with the holdouts.
Despite investors shying away from the government’s botched attempt earlier this month to issue $3bn in new dollar debt under Argentine law and to swap $6.7bn in debt that matures next year, foreign exchange reserves have been shored up through a range of creative measures. These include an $11bn currency swap facility with China and pressuring grain exporters to cash in $5.7bn by the end of the year.
The stabilisation of central bank reserves — which have remained steady since a 20 per cent devaluation in January, recently rising above $30bn — may have emboldened the government’s hardline attitude towards the holdouts.
Negotiations so far have foundered because of the gap between the demands of the holdouts to be paid in full and what the government is prepared to pay.
“[The holdouts] will have to reassess their demands. We’re not crawling through the desert in search of every last dollar,” Axel Kicillof, economy minister, said recently.