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 Argentine Economy Minister Axel Kicillof hurried 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.
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 that the two sides had
not decided whether to meet on Wednesday.
Argentina has until the end of Wednesday to break the deadlock. If
it fails, U.S. District Judge Thomas Griesa will prevent Argentina
from making a July 30 deadline for a coupon payment on exchanged
bonds.
Argentina's key dollar bond due 2033 rose sharply on Wednesday, and
its debt insurance costs fell as investors took some cheer from the
meeting.
Argentina's five-year credit default swaps dropped 30 basis points
from Tuesday's close to 1,869 basis points, according to Markit. The
CDS had hit six-week highs on Tuesday. The nation's one-year credit
default swaps dropped 51 basis points from Tuesday's close to 4,708
basis points.
The CDS continue to price in a very high probability of default in
the near term.
"Bonds have fallen in recent days but are far from pricing a
default," said Emiliano Surballe, fixed income analyst at Bank
Julius Baer.
"While nothing has been done yet to avoid a default, the chances of
a last-minute transfer of funds to pay creditors leaves the door
open for a boom (if Argentina pays) or bust (should there be a
default)," Surballe said.
The hedge funds are owed $1.33 billion plus accrued interest, but an
equal treatment clause in an agreement Argentina made with
bondholders in 2005 would cost the nation many billions more.
FOCUS ON RUFO CLAUSE
Latin America's No. 3 economy has for years fought the hedge funds
that rejected large writedowns, but after exhausting legal avenues,
it faces default if it cannot reach a last-minute deal. According to
bank sources and media, a group of private banks in Argentina is set
to offer to put up $250 million as a guarantee to convince lead
holdouts of the nation's good faith and convince Griesa to
re-establish the stay.
Kicillof's unexpected appearance in New York raised hopes that there
was still time to avoid a default that would bring more pain to an
economy already in recession, though not the economic collapse seen
in 2002 when it defaulted on $100 billion in debt.
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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 exchanged bonds 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 street
protests and the authorities froze savers' accounts to halt a run on
the banks.
Christine Lagarde, the head of the International Monetary Fund, said
on Tuesday that an Argentine default was unlikely to prompt broader
market repercussions, given the country's relative isolation from
the international financial system.
(Additional reporting by Carolyn Cohn in London, Alejandro Lifschitz
in Buenos Aires and Daniel Bases in New York; Editing by Lisa Von
Ahn)
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