Extra credit

21 December 2015 By Reynolds Holding, Martin Langfield

Argentina and Elliott Management will finally give peace a chance in 2016. There may never be a better time for Latin America’s third-largest economy and Paul Singer’s hedge fund to end a 14-year standoff over defaulted bonds. New President Mauricio Macri needs access to global credit markets to implement his economic plan, and another defiant Peronist like predecessor Cristina Fernandez could take over if he fails.

An Elliott affiliate has sought repayment of the bonds since Argentina’s 2001 default. It and other investors refused to swap them for discounted debt in 2005 and 2010, and in 2012 won a court order saying creditors that accepted the exchange could not be paid first. Argentina protested mightily, even appealing to the U.S. Supreme Court, but to no avail.

Obstinance has come at a high price. The nation faces double-digit inflation, dwindling foreign reserves and a gaping fiscal deficit. The economy will grow just 0.4 percent this year and shrink 0.7 percent in 2016, the International Monetary Fund forecast in October. A settlement with the holdouts, owed up to $15 billion, could reopen sources of foreign capital and help reboot growth.

A resolution is far less urgent for Elliott, considering its total sovereign debt holdings are less than 2 percent of its more than $27 billion of assets under management. Yet the expense of battling for repayment is mounting, and the firm is eager for a return on its investment.

Fernandez called the holdout bondholders “vultures.” But just before his Dec. 10 inauguration, Macri sent an emissary to meet the court-appointed mediator in the dispute. Though the shape of any deal is unclear, it would surely exceed the less than 30 cents on the dollar offered in the 2010 exchange.

The trick for Macri will be getting any deal through a left-leaning Congress, where he might be able to bargain, among others, with pragmatic Peronists not loyal to Fernandez. If the new president can’t fix the economy, his administration could quickly founder. A far less amenable counterparty might then succeed him – maybe even Fernandez herself, who could try to return in 2019. That alone should persuade Elliott and Argentina that further stalemate is pointless.

This view is a Breakingviews prediction for 2016. Click here to see more predictions.

 

Email a friend

Please complete the form below.

Required fields *

*
*
*

(Separate multiple email addresses with commas)