President Mauricio Macri has brought Argentina a giant step closer to accessing global capital markets by reaching an agreement with the country’s most recalcitrant holdout bondholders this week. The betting is that he will win approval of the deal from the Argentinean Congress before the end of March, despite the fact that his conservative Republican Proposal party lacks a majority in both the Senate and Chamber of Deputies.
Macri’s toughest task lies ahead: raising the money, both on the international and domestic markets, needed to pay off the foreign holdouts and cover Argentina’s yawning budget deficit. Economists estimate that the government will need as much as $43 billion this year. That’s a daunting sum for an emerging market, especially in the current global economic climate.
But first, Macri gets to savor his biggest victory since assuming office in December and ending 14 years of populist Peronist rule. On February 29 the main holdout bondholders — Paul Singer’s Elliott Management Corp. and three other hedge funds — agreed to accept 75 cents on the dollar to settle their claims on defaulted Argentinean bonds. The deal, if completed, would bring an end to years of legal disputes stemming from the country’s $95 billion debt default in 2001.
These holdouts rejected a 2005 Argentinean debt restructuring and later sued the government of former president Cristina Fernández de Kirchner. In 2012 they won an injunction from U.S. District Judge Thomas Griesa, who ordered Argentina to pay the holdouts in full before paying off any of its restructured debt through so-called exchange bonds. Griesa’s ruling effectively locked Argentina out of global capital markets and triggered another sovereign default in 2014.
Under their deal with the Macri government, the Singer-led holdouts will receive $4.65 billion, including principal and accrued interest as well as legal and other fees. In previous weeks, similar agreements were reached with other holdouts for $3.2 billion. Another $1.3 billion is held by smaller, so-called me-too holdout funds that have said they will accept whatever terms the larger funds agree upon.
“Our job is done,” Finance minister Alfonso Prat-Gay said in announcing the agreement at a Buenos Aires news conference. “Now it’s the responsibility of Congress.”
Stalwarts of Fernández have vowed to oppose the deal. Her former central bank governor, Alejandro Vanoli, tweeted this week against “a bad accord that deeply compromises the fiscal and external accounts of our country.”
But even though Peronists and their allies have majorities in both legislative houses, Macri has reason to be optimistic that Congress will uphold the deal, because it enjoys the support of provincial governors. “With Fernández gone, the power in the Peronist party is back in the hands of the governors,” says Daniel Kerner, chief Latin American analyst at Washington-based Eurasia Group, a political risk consultancy. “And for them, this deal is important because it grants the provinces — not just the federal government — access to capital markets.”
Nor can Peronist hard-liners count on public opinion. Fernández tried to turn the battle with the holdouts — “vultures” and “financial terrorists,” as she denounced them — into an ideological, nationalistic issue. “But for the average Argentinean today, the big three issues are inflation, jobs and crime,” says Sergio Berensztein, a Buenos Aires–based political analyst. “And there is a broad consensus that this saga should come to an end.”
It will turn out to be an expensive saga. According to Prat-Gay, the government will have to raise up to $15 billion to repay the holdouts as well as the holders of exchange bonds. The minister says the government will raise this entire sum on the international capital markets. “Everybody is pitching for the business, and ultimately several different banks will be involved,” says Edwin Gutierrez, London-based head of emerging-markets sovereign debt at Aberdeen Asset Management.
In addition, Argentina will need to tap the capital markets — both at home and abroad — for up to an additional $28 billion this year, according to Alejo Costa, head of strategy for Puente, a leading Buenos Aires–based brokerage. Some $25 billion will be needed to cover the federal government’s budget deficit, which is estimated at more than 6 percent of gross domestic product. “The question is how it will be divided between the central bank, domestic issuances and global capital markets,” says Costa. His brokerage calculates that Banco Central de la República Argentina will cough up $10 billion, and $8 billion will be raised abroad, with Argentinean investors buying the remaining $7 billion in bonds. An additional $3 billion will have to be raised, mostly abroad, to cover provincial deficits.
Selling that much debt could be difficult at a time when capital continues to flow out of emerging-markets economies. But having been shut out from capital markets for so long, Argentina has the advantage of a low debt-to-GDP ratio of only 43 percent in 2014, the last year for which figures available. The comparable figure for neighboring Brazil is 66 percent. Ratings agencies haven’t indicated where they would rate Argentina once the country resolves its defaulted debts, but Moody’s Investors Service recently called Macri’s economic reform proposals “credit positive.”
Although bond investors are excited by Argentina’s prospective return to global capital markets, some equity investors display more caution. Inflation, already running about 30 percent, is likely to rise as a result of the floating exchange rate, wage increases and expensive government subsidies, especially for electricity. GDP growth will be minimal or nonexistent this year, according to consensus economic forecasts. “Also, it remains to be seen whether Macri still has public support in a year or two,” says Will Pruett, Boston-based portfolio manager for Fidelity Latin America Fund.