Argentina reaches deal with “vulture funds” after 14-year legal battle

Court-appointed mediator announces multi-billion deal with most recalcitrant creditor

Argentinean President Mauricio Macri.
Argentinean President Mauricio Macri.Vatican Pool / Getty Images

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Argentina and its creditors – the so-called “vulture funds” – have reached a settlement deal after 14 years of disputes and court battles. Court-appointed mediator Daniel A. Pollack announced that the country and its most recalcitrant creditor, Paul Singer’s Elliott Management, have come to an agreement in principle pending approval from Argentina’s Congress and Senate.

Although President Mauricio Macri and his party are in the minority in both houses, lack of unity among the opposition and his promise to Peronist governors that the deal will allow them to receive new loans may sway enough support to bring about a solution to this long-standing debt battle, which limits Argentina’s access to international financing.

Argentina must deliver payment – which will include “cash, in green dollars” – before the deal expires on April 14

Argentina must deliver payment – which will include “cash, in green dollars” – before the deal expires on April 14, Pollack said. “It seemed like a thousand years to me,” the mediator told reporters on Monday, in reference to the long, drawn-out talks.

Lack of access to the markets, in a country where the vulture funds are a constant and controversial topic of conversation, has had one positive outcome: Argentina now carries one of the smallest public debts in its history. But after four years of economic stagnation, Macri wants to attract foreign investment, and is open to increasing the national debt in order to finance the larger projects needed to kick start the economy.

The latest deal with its creditors is the first big step in that direction. Argentina will break with its financial isolation and make a definitive return to classical economic strategies, a change of policy that has proven controversial at home – prompting demonstrations and strikes among government workers – but has also attracted the international backing of the European Union, United States and organizations such as the International Monetary Fund.

The agreement, which was confirmed on Sunday night after three long months of negotiations in New York, restructures the biggest share of the remaining debt. In previous months, Argentina reached agreements with some smaller creditors but Singer’s group proved to be the toughest adversary. If the deal receives parliamentary approval, Argentina will pay Elliott Management and other “holdout” creditors 75 percent of the principal and interest claimed as well as $235 million to compensate debt-holders’ legal fees over the last 15 years. Macri has offered to pay $6.5 billion. Although investors will suffer a 25% haircut, the deal is better than what others received in the past – some settled for 30% losses.

Although investors will suffer a 25% haircut, the deal is better than what others received in the past

“This is a giant step forward in this long-running litigation, but not the final step,” Pollack said in a statement. He urged Argentinean legislators to repeal the Lock Law and the Sovereign Payment Law, which were passed under the administration of former President Cristina Fernández de Kirchner to effectively block the government from signing settlement agreements with “holdout investors,” which give them a better deal than exchange bondholders who have accepted significant haircuts on what was owed. All parties hope the legislative process will take less than six weeks in order to meet the deadline for payments.

On Tuesday, Macri will deliver the president’s annual speech to inaugurate the first session of parliament. Meanwhile his team is working to rally support, one vote at a time. Fernández supporters reject the deal but insider sources say Macri will likely get enough votes to pass this measure – he has put a lot of pressure on governors and, in Argentina, many lawmakers are more faithful to their regional governor than to their congressional leader.

This agreement in principle is the final blow in the battle between Argentina and this small group of powerful creditors, who rejected previous deals the government offered in 2005 and in 2010 when nearly 93 percent of bondholders agreed to them despite heavy losses. Investors such as Elliott Management specialize in buying up national debt in economically troubled countries and then running to the courts to press for the largest returns possible – a tactic that has earned them the “vulture fund” moniker.

Argentina says it needs to borrow $12 billion in order to pay the last of its debt-holders

Now Buenos Aires will have to turn back to the financial markets to raise the funds to pay. “Holdout” creditors have promised to not interfere with its efforts. Argentina says it needs to borrow $12 billion in order to pay the last of its debt-holders, including the Italian creditors with whom it signed a deal last month.

Once investors have received remittances, New York Federal District Judge Thomas Greisa will automatically freeze all legal action against the country. Besides Elliott Management, the latest agreement includes Aurelios Capital, Davidson Kempner and Bracebridge Capital.

This agreement comes a little less than a month before US President Barack Obama makes an official visit to Buenos Aires, a trip some see as a sign of American support for this change in Argentina’s foreign policy. Sources close to the Argentinean president say indirect backing from the Obama administration during negotiations helped pave the way for the deal.

English version by Dyane Jean Francois.

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