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Argentina set for private investment growth with Paris Club deal

May 29, 2014

Agreement with group of creditor countries over $9.7bn of arrears clears path for finance to the real economy

 Source: Telping
Argentina’s historic agreement to clear its $9.7bn in debt with the Paris Club of creditor nations opens the way to greater private sector investment, economists said on Thursday.

Under the deal announced on Thursday morning, Argentina will clear the arrears over the next five years. It starts with a $650m payment in July, plus interest, followed by a further $500m in May next year.

Economists hailed the announcement as positive, saying it showed the country was serious about resolving the debt restructuring following its 2001/2002 default.

"It’s great news," said Alberto Bernal, head of research at Bulltick Capital. "The most important part is that it will open the door to real sector investment."

Companies from Paris Club countries will now find it easier to extend credit to Argentina, and the energy sector could particularly benefit, said Bernal.

"It was very difficult to get official financing from Europe having Paris Club negotiations pending," said Gustavo Canonero, chief emerging markets economist at Deutsche Bank.

The Argentine finance ministry said the plan cut the cost of the debt, which was previously around 7% a year. The plan gives Argentina the option to extend the repayment schedule by a further two years.

Unlike other Paris Club negotiations, Argentina has essentially agreed to pay the debt in full, said Canonero. "Argentina is not demanding anything in exchange," he said. "It’s not a typical Paris Club resolution."

Argentina is still at risk of technical default, depending on the outcome of a US Supreme Court case with bondholders who rejected the country’s offers to restructure bonds on which it defaulted in 2002. Markets are not paying enough attention to these risks, says Siobhan Morden, head of LatAm strategy at Jefferies.

"There has been goodwill to normalize official creditor relations, but this has not translated to the holdouts of the defaulted bonds," Morden said in a research note published on Wednesday. "The markets have ignored the legal risks on the strategy of administrative delays to overturn the pari passu case at the Supreme Court."

That risk remains factored into Fitch’s CC rating on Argentina’s foreign currency obligations. The agency’s B- rating, with negative outlook, on Argentina’s local currency debt is "perhaps a better reflection of the country’s fundamental risk, absent the US court risk" Shelly Shetty, head of LatAm sovereigns at Fitch Ratings, told LatinFinance.

"While the Paris Club announcement is a step in the right direction, we would look to see evidence of improvements in the country’s fiscal and external financing constraints, and improvements in policymaking," she said. "And we still remain focused on the trajectory of the country’s international reserves." LF



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