Event

On 31 March, the Argentine Senate (the Lower House had already done so on 16 March) cleared the way for the implementation of a deal reached in late February between the government and the country's so-called ‘holdout creditors’ (bondholders affected by the massive sovereign default of 2001 who refused to accept a 70% haircut on their claims in 2005 and 2010). In order to do so, the Senate had to repeal two laws introduced by previous governments that vehemently opposed a deal with the holdouts (which were consistently referred to as ‘vultures’). One of those laws prohibited offering better terms to the holdouts than those previously accepted by other creditors. Yet that is exactly what will happen now, with holdouts having settled for a haircut of about 25%. Constituting a reassuring sign for the new government of President Mauricio Macri, which does not have a legislative majority (see here), congressional approval for the negotiated deal – as well as the anticipated issuance of USD 12.5 billion worth of government bonds in order to finance it – was convincing. Notably, 54 out of 72 Senators voted in favour of the deal, including 26 members of the leftist faction of the ‘Perronist’ opposition: the Victory Front of former President Kirchner.

Impact on country risk

The recent developments imply that a final resolution to Argentina’s messy debt default of 2001 is finally drawing near. Indeed, the few hurdles remaining (a go-ahead from an appeals court in the United States is still needed and some small holdout creditors have yet to accept Argentina’s offer) are not expected to prove insurmountable. A final settlement would clearly be very positive news, not least because it would restore Argentina’s access to international capital markets. This would benefit the liquidity position (while international reserves covered three months of goods and services imports at the end of 2015, doubts prevail about their liquidity), provide financing for much-needed infrastructure investments (at both national and provincial levels) and offer the government an alternative for monetising fiscal deficits (thus underpinning its efforts to bring down inflation). Yet while a positive outlook thus applies to Argentina’s liquidity and solvency risk, that is not to say that the country is out of the woods yet. Indeed, the country is still experiencing stagflation, with the Institute of International Finance expecting a 0.5% of GDP contraction and 25% inflation in 2016. Analyst: Sebastian Vanderlinden, s.vanderlinden@credendogroup.com