Tuesday, November 17, 2015

Argentina Elections Raise Hope of End To Battle With Holdouts

Argentina election raises hope of end to battle with ‘holdouts’

Frontrunners in Argentina’s presidential election are keen to resolve dispute with US bondholders
‘Holdout’ leader Paul Singer (centre) and presidential candidates Daniel Scioli (left) and Mauricio Macri
‘Holdout’ leader Paul Singer (centre) and presidential candidates Daniel Scioli (left) and Mauricio Macri
The end may be in sight. After 14 years of isolation from international capital markets — thanks to a gruelling legal dispute with a group of US hedge funds — hopes are now high that Argentina may soon return to the fold.
As President Cristina Fernández de Kirchner’s eight-year stint in power comes to a close, Argentines will elect a new leader on November 22 who is almost certain to make a concerted attempt to resolve a dispute that has starved the economy of dollars.
Whether Argentina’s new president is Mauricio Macri, the centre-right mayor of the city of Buenos Aires, or Daniel Scioli, the government-backed governor of the province of Buenos Aires, both are committed to putting an end to the long-running legal battle, either out of ideological conviction or necessity.
Mr Macri, now seen by many as the favourite after a strong showing in the first round of the elections last month, is committed to opening up Argentina’s economy to the world — including unfettered access to financial markets.
“It is important not to have any conflicts with the world,” said Mr Macri in an interview, pledging to resolve the conflict with the “holdout” bondholders, who rejected debt restructurings after Argentina’s 2001 sovereign debt default. In 2012 they won a US court order that prevents the government from making other debt payments unless they pay the holdouts in full at the same time.
Mr Scioli, in turn, would perhaps move even more quickly than Mr Macri to put an end to the problem, according to one person close to Ms Fernández’s chosen successor.
“For Scioli, it is very important to fix the holdouts issue because it is the only way you can open the door to money from abroad,” he says. He adds that Mr Scioli’s reluctance to remove capital controls quickly and cut back on costly subsidies — in contrast to Mr Macri — means that he will have to seek external financing to close a fiscal deficit of as much as 8 per cent of gross domestic product.
Ms Fernández’s refusal to negotiate with what she calls “vulture funds” has forced the government to resort to financing the deficit by printing money. This has spurred one of the highest inflation rates in the world.
Although a new government may be willing to settle the dispute with the holdouts, who are led by US billionaire Paul Singer’s Elliott Management, whether they will be able to is another matter. It may be tougher to reach a deal than some anticipate.
After 14 years of isolation from capital markets, the country may return to the fold
“The deal that worked in 2005 did not work in 2008, and what worked last year may not be what works today or in January,” says Marcelo Etchebarne, an Argentine lawyer based in New York who follows the case closely.
Further complicating matters, Thomas Griesa, the New York judge who awarded the original “pari passu” injunction to the group of holdouts led by Mr Singer for bonds now worth around $1.7bn, recently broadened the scope of that order. It will now be applicable to the so-called “me-toos”, who own claims worth at least $6.1bn and make up most of the remaining holdouts that refused to accept Argentina’s restructuring deals in 2005 and 2010.
“This will make negotiations far more challenging for both Argentina and the holdouts,” says Mr Etchebarne.
A deal would then have to be approved by Argentina’s Congress, but whoever wins the election will not control a majority. That could be especially problematic for Mr Macri, who would be likely to face fierce opposition from more radical leftwing lawmakers.
Another concern is that Argentina’s access to capital markets may be complicated by the political and economic crisis in Brazil and the imminent rise of interest rates in the US, as well as the continued deterioration of Argentina’s economy, including the level of international reserves, the fiscal deficit and inflation.
Additional challenges include fixing the situation without triggering an “acceleration” of debt payments, whereby groups of bondholders with restructured debt that Argentina defaulted on last year could demand immediate payment, effectively forcing a fresh default.
Nevertheless, Mauro Roca, an economist at Goldman Sachs, argues that Argentina has at least some time in hand to fix the problem thanks to the fact that external imbalances are the least severe of its macroeconomic challenges. The current account deficit is moderate, while debt payments next year are relatively low.
“It does not appear probable that the short-term deterioration in macroeconomic conditions would be enough to force the hand of the next administration into rushing to find a prompt solution with holdout investors,” he says.