US: Credit Market

Argentina about to return to credit markets?

Argentina could be about to return to global credit markets, with analysts expecting a completed deal that would pay back holdout creditors following the country's 2001 default.

On Tuesday, Reuters reported that Argentina had agreed to a $4.65 billion cash payment to its foreign creditors (a group of U.S. hedge funds) following 15 years of legal battles after the country's infamous default on $95 billion of debt in 2001.

Finance Minister Alfonso Prat-Gay said he hoped to issue two or three new sovereign bonds on international markets for a total of up to $15 billion in April if lawmakers were swift in backing the accord, Reuters added. Those bonds would finance the payout to all creditors who had reached the agreement.

A man passes by grafitti that reads "Vultures, get out" in Buenos Aires, September 24, 2014.
Marcos Brindicci | Reuters

However, Argentina's congress is still due to vote on the deal this week. To pass the deal Congress has to repeal laws brought in by the country's former president Cristina Fernandez de Kirchner which forbade paying the hedge funds. Congress has to approve the deal by April 16.

Without access to foreign investment, Argentina's once-robust economy has slowed down and international confidence in the country has been shaken. But since the election of President Mauricio Macri in November, there have been moves to reform the country's economy and return it to firmer ground.

Last October, the International Monetary Fund (IMF) forecast that the economy would shrink by 0.7 percent in 2016 and for inflation to be around 25 percent. But, there are hopes that Macri's economic policies will prompt a fractured political establishment to unite in order for the economy to recover.

"For Argentina, resolving its problems with creditors is paramount. It will help restore confidence in the country, and it should help increase inflows of investment and capital. Also, a swift and agreeable conclusion to its creditor problem could pave the way for eventual rating upgrades and the inclusion of Argentina in EM (emerging market) indices," Andres Abadia, senior economist at Pantheon Macroeconomics, said in a note last week.

"Macri won a convincing victory in the presidential election but he has a relatively weak position in the Congress, although it has improved slightly in recent weeks. One instrument that the government has working in its favor is that it is in charge of the federal funds. In theory, it might be able to use this as a tool to obtain support to reform the required laws."


Argentina settles 15-year battle with hedge funds
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Argentina settles 15-year battle with hedge funds

improved slightly in recent weeks. One instrument that the government has working in its favor is that it is in charge of the federal funds. In theory, it might be able to use this as a tool to obtain support to reform the required laws."

However, he warned that the process "will not be a straight shot at the domestic level" and that Macri could face stiff opposition from "Peronismo," a political movement regarded by many as "right-wing socialism." This has dominated Argentina's political scene since President Juan Domingo Peron and his second wife Eva Peron held power in the 1940s.

Potentially giving Macri a boost is the fact that Cristina Fernandez de Kirchner's political party, the Front for Victory (FPV), suffered a split in February, hopefully giving Macri a chance to push the legislation to allow the payback to creditors through Congress.

Barclays economists Pilar Tavella and Sebastian Vargas said that with the break of the FPV, "Macri is closer to getting a majority in the lower house to pass needed legislation."

"We expect his administration and the opposition to negotiate a comprehensive agenda. The division in peronismo is a reflection of a minority that represents more extreme left-wing ideals and a more pragmatic peronismo that finds there is no gain in blocking a new administration that counts on strong levels of popularity."