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Emerging Markets

Holdouts on hold

Don’t believe the hype. Progress on resolving $29 billion of defaulted debt is unlikely any time soon

Don’t believe the hype. Progress on resolving $29 billion of defaulted debt is unlikely any time soon

Over the past year Argentine authorities have on several occasions hinted that they might move forward in resolving a four-year-old dispute over $29 billion of defaulted bonds, investors in which held out against the terms of a 2005 debt swap.

Officials have similarly dropped hints that the government wants to resolve $6.7 billion in debt it owes the Paris Club of creditors.

Yet as quickly as the issues are mentioned, they drop back off the agenda again.

Supposed progress on the holdout debt was mooted again earlier this month. As the global financial crisis lends renewed urgency to claims by holders of the $29 billion of defaulted bonds, investors look for ways to clear their books and to turn the defaulted debt into liquid fixed income instruments as soon as possible.

The received wisdom is that the aggrieved investors are increasingly looking for “creative” solutions to resolve the debt negotiation.

Argentina’s government is prohibited by law from re-opening the 2005 debt swap, thanks to a bill shepherded through Congress by then president Nestor Kirchner. As such, the country cannot be seen to be negotiating on the issue. Instead, the strategy appears to be to maintain the impression that bondholders are approaching the government with new proposals while authorities are airily above the fray.

Still, Argentine-based economic analysts are sceptical that there will be any positive action on the holdouts any time soon – and certainly not this year. But they acknowledge that a speedy resolution of the issue would be beneficial.

“The operating problems caused by the incomplete restructuring – such as the risk of embargoes which, among other things, force the central bank to keep funds overseas in safe havens with very low earnings – are accumulating,” notes an economic adviser to an opposition party.

Economist Mario Brodersohn says that resolving the holdout issue is a “necessary but not sufficient step” on the road towards Argentina’s return to international capital markets. “This government will never assume the political cost of such a move after its repeated and resolute rejections,” he says.

Argentine lawyer Pablo Giancaterino, of US firm Proskauer Rose and Sirota & Sirota, together with fellow Argentine lawyer Guillermo Gleizer recently unveiled the latest effort to think outside the box on the outstanding debt. The proposal, like others reportedly put forward by JP Morgan and Elliott Associates, would involve creating a trust fund.

In Giancaterino’s scheme, the holdouts would deposit in the trust funds adjudicated to them in court verdicts, against which they would receive tradable paper and interest payments on capital that would be discounted by the same amount as in the 2005 swap, or 66%. The adjudicated funds plus the interest payments would be used to invest in tax-free energy and infrastructure projects, he explained recently.

Barclays, Citibank and Deutsche Bank last year drafted a plan for a traditional bond swap, announced to much fanfare by president Cristina Fernandez de Kirchner, with whom the banks’ senior representatives met publicly at the Casa Rosada.

But months on, that plan still languishes. The banks remain in contact with finance secretary Hernan Lorenzino and Cabinet chief Sergio Massa, both of whom have lost clout as the government’s attention shifts to the convulsing political front. According to local sources familiar with the plan, it stalled not just because of government disinterest but also because bond holders’ willingness to turn over cash evaporated with the international crisis.

A source at one of the best-known so-called vulture funds, who asked for anonymity, says that the most recent claims that it would support measures to repurchase debt or counter default paper were “simply wacky”.

A local bond trader was equally dismissive: “No one even knows who they’ll be talking to – if anyone – after June 28.”—J.E.

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