Argentina looks for loans amid default battle

Argentina is pushing ahead with plans for a new loan package from the World Bank, which Economy Minister Hernan Lorenzino said would be used for financing new social programmes.

However the country’s default on its bonds more than a decade ago continues to cloud its future. Details have not been settled and Bank officials were not as ebullient as Lorenzino. One official said only that the Bank was “preparing a strategy to go forward with Argentina”.

Lorenzino said the strategy was for Argentina to make a payment to the Bank of $500 million in the form of new bonds or cash in exchange for new loans totaling $3 billion.

Analysts are divided over the new loan and a host of issues, including the country’s economic and political situation and resolution of its 13-year old default.

John Welch, macrostrategist at Canadian Imperial Bank of Commerce (CIBC), said “Argentina would not have to do a lot to get all the funding it needs. They would have to do little to turn the boat and get things going the other way.”

Joydeep Mukherji, managing director of sovereign ratings at Standard & Poor’s, was not convinced. He said he did not think it would be easy for Argentina to work its way in or convince investors.

He said the country faced questions about inflation, exchange controls and unpredictability about policy, in addition to lingering problems with 2002 default.

President Cristina Fernandez’s government was rebuffed on 7 October in an attempt to get the US Supreme Court to hear an appeal on a lower court’s ruling concerning the default.

While Argentina reached settlements with 93% of it bondholders in negotiations in 2005 and 2010, receiving less than $0.30 on the dollar, holdouts want to be paid in full.

The Supreme Court filing was aimed at reversing a decision a year ago by the 2nd U.S. Circuit Court of Appeals in New York against the country. Argentina still has opportunities to refile appeals.

Mukherji said S&P’s triple C rating with a negative outlook for Argentina was “driven by court cases on bonds. There is a pretty good chance that there will be an injunction so you can’t use the clearing system to pay bondholders and that would be a default.”

He said even if the court battles were to end, there were other problems in Argentina’s economy that were troubling, including inflation, exchange controls and the unpredictability of policies.

Inflation is a controversial issue, with opposition parties in the country reporting that inflation was 25.4% year-on-year in September. The government’s forecast is closer to 10%, but Bank of America Merrill Lynch estimates higher peso issuance and falling reserves is likely push up inflation further for the rest of the year and into 2014.

Against this backdrop is also the possibility of political uncertainty in Latin America’s third economy. The president’s party is expected to do poorly in the upcoming 27 October mid-term congressional elections.

There is now growing speculation about the president herself. Fernandez underwent emergency surgery for a cerebral hematoma on 8 October, taking her out of politics for at least one month.