Economist: Argentina reaches a deal with its creditors

3 Μαρ 2016

For more than 14 years Elliott Management, the hedge fund led by Paul Singer, was the pantomime villain in Argentina’s dispute with its bondholders. Rather than accepting a big write-down, as other creditors did during restructurings in 2005 and 2010, Elliott, along with several other “holdout” creditors, pursued full payment through the New York courts. That led to a default by Argentina in 2014.

   Now the drama is entering its final act. On February 29th Daniel Pollack, the court-appointed mediator, announced that Argentina had reached an agreement in principle with four of the largest creditors, led by Elliott. Argentina’s payment of $4.65 billion will be 25% less than they were claiming. With this agreement, Argentina has settled with creditors who hold 85% of the disputed debt.
   It is a coup for Mauricio Macri, Argentina’s recently elected president, and will end the country’s long isolation from the international credit markets. Together with other steps Mr Macri has taken since assuming office in December, including ending exchange controls and removing taxes on exports, the credit deal helps restore normality to an economy that had been distorted by populist controls during 12 years of rule by his two Peronist predecessors, Cristina Fernández de Kirchner and her late husband, Néstor Kirchner.
   Argentina’s negotiators paved the way by reaching deals with smaller groups of holdouts. On February 2nd Argentina agreed to pay a group of Italian bondholders $1.35 billion; on February 5th it settled for $1.1 billion with two of the six largest holdouts, Montreux Partners and EM Ltd. But Mr Singer’s Elliott Management led the most intransigent group; an agreement with them is the real prize.
   Once the laws have been scrapped, the government hopes to raise up to $15 billion through a bond issue which it will use to pay the creditors. Some analysts doubt that the market can absorb such a large bond issue in one go. But Argentina’s finance ministry is bullish. “All the banks we’ve spoken with are confident that we can raise the money we need in the market,” said Luis Caputo, the finance secretary. “We’re optimistic.”
   The government then plans to return to the market in an effort to finance its budget deficit, which was a massive 5.8% of GDP last year. Under Ms Fernández’s administration the central bank financed the budget deficit by printing money, pushing up inflation. The bond issue will help the central bank to end that harmful practice, but the relief from high inflation will not come immediately. Propelled by the devaluation of the peso, the annual inflation rate has risen to around 30%; the government had hoped inflation this year would be 20-25%. It is trying to persuade trade unions not to demand excessive wage rises, which would drive inflation even higher. The unions are taking a hard line, however. On February 26th teachers extracted an agreement from the government for a 32% salary increase; other unions will demand a pay rise at least as big.
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