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Argentina default risk still high, despite talks

Jun 24, 2014

Country has said that it is ready to negotiate, yet time pressures mean that default is still a likely scenario

   Source: Casa Rosada  
With a debt payment deadline fast approaching the chances of an Argentine default are high, despite the sovereign saying it is willing to negotiate with holdout creditors, sources have told LatinFinance.

The Argentine government has said that it would be "impossible" to make a $900m payment to restructured bondholders by June 30, which would trigger a technical default following a 30-day grace period.

A default is still the most likely scenario, say sources. But the country is in better economic shape than when it last defaulted in 2002, while Ecuador’s successful return to the market last week shows that investors may overlook a short-lived default.

"I suspect Argentina will go into technical default, but it won’t last long. And investors will continue to chase yield. Under normal circumstances, this would be the kiss of death, as it was in 2002. But times have changed, and markets are forgiving," said one portfolio manager.

Jefferies said it expects a protracted negotiation, and therefore sees a 65% to 70% chance of default.

"The latest official rhetoric has been more moderate signaling willingness to negotiate with the holdouts without mention of the workaround solution. This is the first clear encouraging signal from Argentina and explains the knee-jerk recovery back to pre-judgment price levels for the discount bonds," the investment firm said in a note on Monday.

An agreement hinges on whether or not the parties will make concessions. "It boils down to what NML will accept. And that’s anyone’s guess," said another investor.

But as well as making concessions, the negotiators would have to overcome another major hurdle. The agreement with restructured bond holders is subject to a clause that prevents Argentina from offering holdout creditors better terms than those given to the investors that subscribed to the 2005 and 2010 exchanges. The clause expires at the end of the year.

"One possible solution that has been proposed is that the Argentine government deposit funds into an escrow account as a show of good faith, with a view to then renegotiating terms with holdouts once the lock law has expired at the end of this year," Capital Economics said in a research note on Monday. LF

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