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During the Christmas holidays, Argentines were given an unwelcome reminder of how their country is struggling with limited foreign currency reserves when tampons started to disappear from supermarket shelves.
Predictably, officials and businesses blamed each other for the shortages. But attention was turned again to one of the biggest challenges ahead of this year’s presidential election: Argentina still cannot borrow abroad after it defaulted in July on its foreign debt for the second time in 13 years.
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The latest opportunity to rectify matters has so far been ignored, with talks between the government and a group of holdout hedge funds, led by Paul Singer, a US billionaire, yet to resume after the default in July.
A deal with the hedge funds, which hold defaulted Argentine bonds and have won a New York legal rulingthat requires them to be repaid $1.3bn plus interest, would reopen Argentine access to international capital markets — and thus desperately needed hard currency to pay for imports, such as tampons. But “the [negotiating] positions are just too far apart”, says Agustin D’Attellis, a member of a group of heterodox economists that works closely with the government.
While President Cristina Fernández is reluctant to concede too much to the “vulture funds” before she steps down in October — she has made defying them an article of political faith — failure to reach a deal would not only hit the economy but may force Argentina to agree eventually to much less favourable terms.
For now, despite the plunge in commodities prices, Argentine officials seem confident their soya-led economy can make it through the year without a holdout deal, after stemming a fall in central bank reserves.
These have risen above $31bn, largely thanks to an $11bn currency swap with China last year, and the halving in oil prices, which could relieve Argentina’s crippling energy import bill by $3bn.
The government hopes to keep the economy afloat with additional help from allies such as China, which Ms Fernández is due to visit next month, and executing a more successful re-run of a botched attempt last month to issue $3bn of dollar-denominated debt under local law.
“Argentina is going to explore alternative channels [of financing] first before bowing to pressure from the vulture funds,” says Mr D’Attellis.
Indeed, analysts say Ms Fernández would prefer to muddle through until her term ends, leaving the problem for her successor to solve. She is expected to resume holdout negotiations to keep market hopes of a deal alive. One reason for that is to discourage investors holding restructured debt from “accelerating” their bonds and demanding immediate payment. That would generate chaos and could lead to yet another debt restructuring.
While her strategy might make short-term political sense, it also leaves the economy teetering on the edge. “The situation will be pretty bad next year,” said Mario Blejer, an economist advising Daniel Scioli, the leading presidential candidate for the ruling Peronist party.
In the coming year, the government will struggle to contain a growing fiscal deficit, according to Marcos Buscaglia, economist at Bank of America Merrill Lynch. Moreover, as it is financed by money printing, that could add further pressure to inflation, running at more than 30 per cent.
“The new administration will face a high fiscal deficit in December , with low reserves and no central bank financing left. It will probably have to issue debt and devalue the currency upfront,” said Mr Blejer. The tight spot facing the new government meant it would have to cut a deal with the holdouts on much less favourable terms.
For now, investors remain sanguine. The price of Argentina’s benchmark 2033 restructured dollar bond has hovered at about 91 cents to the dollar, even though Axel Kicillof, the economy minister, reiterated this month the government would only be willing to offer the holdouts a small improvement on the offer they refused in previous debt restructurings. This offer represents 82 cents on the dollar, according to Barclays, compared with the original debt exchanges where bondholders received 64 cents at current prices — while the holdouts are legally entitled to about 300 cents.
One reason for the market calm is investor confidence that the next president will sort out the economy.
The challenges for the new president will be great, not least because of an expected pre-election stimulus package that Nicolás Dujovne, an economist, compares to the late Hugo Chávez’s reckless pre-election splurge in 2012 in Venezuela, where the pain is still being felt.
“Economic policy will be made with only the next 300 days in mind, without caring about how to repair the damage in 2016,” said Mr Dujovne.