Argentina’s attempts to normalize relations with international creditors may have been thrown off course by the magnitude of the international capital markets meltdown.
A source close to negotiations on reopening the exchange of $20 billion worth of defaulted bonds, said the talks were “on hold”. The source, who declined to be named because of confidentiality agreements, said: “The international crisis will delay any normalization.”
The so-called holdouts rejected the terms of Argentina’s proposed 2005 debt restructuring, and some of them have filed law suits that have effectively cut off Argentina from the international debt market.
The source said: “They would need the market to come back before they can move ahead with this, because the initial discussion about a new bond with a 12.5% coupon is just not practical today.”
Bond holders would also to be required to inject more cash before the swap can be completed, according to the preliminary proposal. However, an Argentine government source said that “adjustments” were being made to the new offer to creditors.
The attempt to reopen the exchange, announced last month by president Cristina Fernandez de Kirchner in New York, is part of the Argentine government’s efforts to put an end to old controversies. It has also offered to settle its $6.7 billion debt with the Paris Club.
The government, which has accumulated substantial foreign reserves of $47 billion, will now have to resort to alternative strategies in order to trim the domestic debt down with local pension funds.
Although the government has met much of its financing requirement for this year, the lack of access to international capital markets in a prolonged stressed scenario may expose Argentina to further financial trouble in the medium term.
Central bank president Martin Redrado said, in exclusive comments to Emerging Markets: “The [Argentine] banking system currently buffers crises instead of spreading them, as was the case in the past.”
But problems could be exacerbated by the fact that most creditors still have a very vivid memory of the $100 billion 2001 debt default.
Kenneth Levine, a litigator at Carter Ledyard & Milburn, said: “Investors are always sceptical of Argentina because of its history of walking away from its debt obligations. I can see no reason why in a few years’ time there may not be a change of political will again, especially if the economy is not proving strong enough.”
The drop in oil prices, which is one the main sources of revenue for Argentina is “a big concern to investors”, he said, as the primary budget surplus may be slashed by half, according to private sector economists.
An emerging market analyst said: “They are not doomed to default again but the picture looks less rosy than it was until last year.”
Anoop Singh, director of the IMF Western hemisphere department, said: “We have been in touch with all governments, including Argentina.”