The latest Par bond coupon payment fell due on September 30th, at which point the government deposited US$161m for the payment in the country’s largest state-owned bank, Banco de la Nación, as it attempted to evade payment restrictions made under a US court ruling that seeks to force Argentina to repay holdout creditors at the same time that it pays current bondholders. The debt swap was approved by Argentina’s Congress in September, but not a single bondholder proved willing to participate in a restructuring that changes the jurisdiction in which the bonds are to be repaid.

There have been clear legal and practical obstacles to involvement in the debt swap. Participants face possible contempt of court rulings in New York, while identification of bondholders would be difficult without the participation of the Bank of New York Mellon, the original payment agent for the exchange bonds. However, exchange bondholders are probably also holding out for a better deal, and speculating that an agreement between the government and holdouts will be concluded at the start of 2015, when the rights upon future offers (RUFO) clause expires. The RUFO clause could in theory force the government to give exchange bondholders the same terms that it gives holdouts under any deal, a proposition that the government cannot afford. A quick deal made after the expiry of the RUFO clause would allow Argentina to exit default.

Acceleration risk

A deal with holdouts in 2015 would also eliminate acceleration risk, which has been rising in recent months as holders of defaulted exchange bonds consider their repayment options. The exchange bonds, along with the Par bonds, include acceleration clauses that allow bondholders to demand repayment in full in the event of default, if at least 25% of bondholders agree. So far, bondholders have been reluctant to take such a dramatic step, not least because it would in all likelihood result in lengthy litigation, creating a “second-generation” of holdouts with little certainty of repayment. But the longer the government refuses to negotiate with current holdouts, the more acceleration risk rises.

Although The Economist Intelligence Unit remains sceptical about the government’s desire to reach a deal with the holdouts, it has been rumoured that the government is indeed considering an agreement with private banks and holdout creditors, which includes not just the litigant holdouts involved in the ongoing US court case (NML and Aurelius) and would involve repayments of between US$7bn and US$10bn. According to press reports, such an agreement could involve cash payments by private banks, which would in turn receive bonds issued by Argentina’s Treasury.

Apart from eliminating acceleration risk, such a deal would allow Argentina to emerge from over a decade of default and start to normalise relations with international capital markets. In the government’s straitened circumstances, such a possibility could finally prompt it to act. Pressure on the balance of payments and the currency is evident in the foreign reserves, which have halved over the course of the past three years. There has been some recent relief in the form of the receipt of US$814m, the first tranche of a currency swap agreed with China in July, which pushed the reserves back above US$28bn. However, these effects will be only temporary given strong demand for dollars by savers amid still-high devaluation expectations. In this context, an end to the default saga seems increasingly urgent if the government is to avoid a currency crisis.