By Richard Lough
Argentina faced a race against on time on Wednesday to avert its second default in 12 years, needing to either cut a deal by the end of the day with “holdout” investors suing it or win more time from a US court to reach a settlement.
Argentine Economy Minister Axel Kicillof scrambled to New York on Tuesday to join last-ditch negotiations, holding the first face-to-face talks with the principals of New York hedge funds who demand full repayment on bonds they bought at a discounted rate after the country defaulted in 2002.
The hedge funds are owed $1.33 billion, but an equal treatment clause in an agreement Argentina made with bondholders in 2005 would cost Argentina many billions more.
Kicillof emerged from talks late on Tuesday saying only that they would resume on Wednesday, but mediator Daniel Pollack said issues dividing the parties “remain unresolved” and it was still undecided whether the sides would meet on Wednesday.
Latin America’s No. 3 economy has for years fought the holdout hedge funds that rejected large writedowns, but after exhausting legal avenues Argentina faces default if it cannot reach a last-minute deal.
Argentina has until the end of Wednesday (0400 GMT on Thursday) to break the deadlock. If it fails, US District Judge Thomas Griesa will prevent Argentina from making a July 30 deadline for a coupon payment on exchanged bonds.
Kicillof’s unexpected appearance in New York raised hopes there was still time to avoid a default that would pile more pain on an economy already in recession, though not the economic collapse seen in 2002 when it defaulted on $100 billion in debt.
“Avoiding a default is still feasible and, even if there is a default, we believe the government could manage market expectations,” Bank of America Merrill Lynch said in a briefing paper on Tuesday.
The Buenos Aires government has pushed hard for a stay of the U.S. court ruling that triggered Wednesday’s deadline.
Its chances of success were boosted on Tuesday when holders of Argentina’s euro-denominated exchange bonds on Tuesday said a suspension would encourage a settlement.
They also said they would facilitate a deal by waiving the so-called RUFO clause that prevents Argentina from offering other investors better terms than it offered them.
Argentina has consistently argued the RUFO clause prohibits it from settling with the holdouts.
“Obtaining a waiver of the RUFO clause, however, will take time,” the group of bondholders said in an emergency motion for a stay filed on Tuesday.
While unnerving, the debt crisis is a far cry from the turmoil of Argentina’s record default in 2002 when dozens were killed in bloody street protests and the authorities froze savers’ accounts to halt a run on the banks.
How much pain a new default would inflict depends on how quickly Argentina could extricate itself from the mess. That would largely be determined by whether Argentina had persuaded enough bondholders it was ready to negotiate a swift settlement after the Dec. 31 expiration of the RUFO clause.
Christine Lagarde, the head of the International Monetary Fund, said an Argentine default was unlikely to prompt broader market repercussions given the country’s relative isolation from the international financial system.
South American leaders on Tuesday rallied behind Argentine President Cristina Fernandez, castigating the holdouts as financial speculators menacing the entire region.