MS Risk Blog

A historic agreement between the government and “hold-out” bond-holders in Argentina sees the 15-year saga enter its final act

Posted on in Argentina title_rule

On 29 February the Argentine government agreed to a historic settlement of $4.65bn with the remaining “hold-out” bondholders, a whopping 75% of the ambitious claims. The agreement holds good on President Macri’s campaign promise to return Argentina to the international financial markets, and reverse the hostile relations with international creditors developed under the 12 years of Kirchner rule.

Since it’s default in 2001, the Argentine government has been locked in one of the most publicised and brutal sovereign debt disputes in history. A small number of bond-holders refused to accept the restructure write-downs in 2005 and 2010, and instead pursued their full payment in the courts in New York. When the judge overseeing the case, Thomas Griesa, declared in 2012 that Argentina could not pay any bondholders until it had reached an agreement with the “hold-outs”, the country was set on course for a technical default. In 2014 the “hold-outs” won a landmark victory in the US courts and Argentina officially defaulted, isolating itself from the global financial markets.

During his election campaign President Macri – who came to office in December 2015 – promised to pay the creditors to ensure Argentina’s return to the financial markets. With a flailing economy, centre-right Macri is determined to move the country away from the populist policies of the past, and regain investor confidence and encourage FDI. Macri has made quick work on his promise, already floating the exchange rate and lifting the controversial export taxes – which had crippled the country’s exports. This latest decision marks a strong handed direction towards building an investor friendly economy, outlining that Argentina is “open for business” again.

While Macri will face strong opposition from some of Fernandez’ former supporters in Congress, and those ideologically opposed to the “bullying” tactics of the “hold-outs”, the legislation is likely to pass, as there is common consensus on the need to return Argentina to the international financial markets. In particular, Macri will be hoping to outline to foreign investors that his presidency is committed to lowering borrowing costs for companies operating in the country and inviting better terms for FDI.

As Argentina swings to the right and tries to take a more central course from the populist policies of the Kirchners, it’s one-time ally Venezuela is struggling with its own pending sovereign debt crisis. Many analysts expect Venezuela to default this year and with few leftist presidencies left in the region, it has few friends to turn to.