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Last-gasp Argentina debt talks

July 30, 2014

Economy Minister Axel Kicillof has flown into New York seeking to reach a deal with hedge fund creditors and avert an Argentine debt default. His arrival coincided with a last-minute cause for optimism in Buenos Aires.

Axel Kicillof Argentinien Finanzminister 25.06.2014
Image: AFP/Getty Images

Economy Minister Axel Kicillof, on an unannounced visit, joined Argentina's existing delegation in New York on Tuesday for 24 hours of court-ordered last-minute talks designed to ward off a second Argentine debt default in 13 years.

The current problems date back to its last default in 2001, and a small group of so-called "holdout" hedge funds seeking full payment on defaulted Argentine bonds, after rejecting the restructuring package agreed to by the majority of Argentina's creditors.

Court-appointed mediator Daniel Pollack gave little away on entering the Manhattan building for the negotiations: "Time is short. We will do the best we can."

Argentina has until the end of Wednesday to either pay the hedge funds in full, cut a deal with them, or win a stay of the court order that triggered the deadline.

Buying some more time?

New York District Judge Thomas Griesa's ruling barred Argentina from servicing its restructured debt without also paying the hedge funds the full $1.3 billion (970 million euros) it owes them.

Buenos Aires had argued, however, that submitting to this would open it up to claims for up to $100 billion from other creditors who had previously agreed to the 70-percent haircut Argentina offered after its 2001 default. These holders of euro-denominated Argentine bonds received a so-called "RUFO" (rights upon future offers) clause - an agreement to pay them the same rates for the bonds as any future deals with other investors.

Argentina's appeal to stay the New York ruling had fallen on deaf ears, but on Tuesday, the euro bondholders called on Judge Griesa to stay his ruling. Their appeal could be received differently at the court.

Symbolbild Argentinien Wirtschaft
Argentina's economy was struggling even before this credit issue aroseImage: picture alliance/Demotix

"A stay will promote and encourage a global settlement," the investors said in a written appeal, while warning that a default "would undo much of the work this court has accomplished over the last 10 years and extend litigation here and around the world for years on end."

The investors said they would be willing to waive their RUFO clause, and that they would seek to get holders of other exchanged Argentine debt to agree to the same terms. "Obtaining a waiver of the RUFO clause, however, will take time," they said.

Domestic dangers of default

The US hedge funds, led by New York billionaire Paul Singer's NML Capital Ltd., had fought Buenos Aires for full repayment for around 10 years. The Argentine government had taken to calling the investors "vultures," playing on the image of picking the country's economic carcass clean, for buying the defaulted debt at discount rates and then suing for full repayment. Argentina's complaints struck a chord with some regional neighbors, including Brazilian President Dilma Rousseff.

"The problem that's affecting Argentina today is a threat not just to a brother nation. It affects the entire international financial system," Rousseff said.

International Monetary Fund Managing Director Christine Lagarde had said that an Argentine default in this case would mean the mechanisms that allow struggling countries to restructure their debt would "have to be reviewed."

Since the default at the end of 2001, Argentina has been largely isolated from global credit markets, meaning another default would not be likely to cause financial turmoil abroad. However, it would hurt a domestic economy already in recession, struggling with high inflation and a weakening currency.

msh/jm (AFP, AP, Reuters)