ARGENTINA'S $82 billion sovereign default in 2001 was the largest ever. More than fourteen years later, the country is still cleaning up the mess. On February 29th it agreed to an expensive settlement worth $4.65 billion with four of the largest “holdout” creditors: those who rejected debt restructurings in 2005 and 2010 and instead pursued Argentina for full payment plus interest through the New York courts (it was under their law that the original bonds were written). Until recently, Argentina refused to negotiate with the holdouts, insisting that it was not prepared to offer more generous terms than those it had offered to the other creditors. So what changed?
During the debt restructurings, 93% of bondholders had agreed to exchange their defaulted bonds for new ones, accepting a haircut of 65%. Unperturbed, the holdouts took their case to Thomas Griesa, a New York judge, who ordered Argentina to pay them in full. Argentina’s government, led by Cristina Fernández de Kirchner, refused. In 2012, in an effort to force Argentina to the negotiating table, Mr Griesa prohibited the country from paying the holders of its restructured debt unless it settled with the holdouts. The decision infuriated Ms Fernández, who branded the judge “senile” and the holdouts “vultures”. Unwilling to pay the holdouts, and unable to pay the exchange bondholders, Argentina defaulted again in 2014.
But in November last year Argentines narrowly elected Mauricio Macri as president. The first non-Peronist to inhabit the Casa Rosada in 16 years, he promised to normalise Argentina’s economy after years of mismanagement by his predecessors. On February 1st finance ministry officials opened negotiations in New York in an attempt to reach an accord with the remaining holdouts. They made quick progress. On February 2nd a group of Italian bondholders accepted an offer of $1.35 billion. On February 17th two hedge funds, Montreux Capital and EM Ltd settled for for $1.1 billion. But it was the four largest holdouts who represented the real prize. Their agreement comes at a cost: the $4.65 billion settlement equates to a write down of just 25%, far more generous terms than were offered to creditors in 2005 and 2010.
Mr Macri calculates that this is a price worth paying. His predecessor left Argentina’s economy is in dire straits: in 2015 it ran a 5.8% fiscal deficit; inflation is currently at around 30%. Borrowing on international credit markets will help him to tackle both. Until now the central bank has been forced to print money to finance the budget shortfall, driving up inflation. Soon Mr Macri’s government will be able to use credit to bridge the gap instead. That gives Mr Macri more time to cut spending, negating the need for a sharp fiscal adjustment, which could threaten jobs and growth. Mr Macri’s economic recovery will take time. But after fourteen years, Argentina’s abrupt U-turn means it is finally heading in the right direction.
From The Economist
