• Argentina might be forced to negotiate bond fight
     | June 18,2014
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    Brokers work at the Buenos Aires Stock Exchange in Buenos Aires, Argentina, Tuesday. Argentina’s President Cristina Fernandez is refusing to go along with a U.S. judge’s ruling requiring repayment of defaulted bonds. The Merval stock index dropped after Monday’s court decision, its largest one-day loss in more than six months, and the value of Argentina’s currency went down on the black market.

    BUENOS AIRES, Argentina — Argentina’s president has objected to the conditions of a U.S. judge’s ruling requiring a $1.33 billion debt repayment, but analysts say she may ultimately have to negotiate with the holdout investors she calls “vultures” to avoid an impending default and a new blow to the country’s reputation.

    President Cristina Fernandez at first indicated she wouldn’t go along with the terms of a judge’s ruling that the defaulted bonds be repaid after the U.S. Supreme Court on Monday left the earlier order in place.

    In a national address Monday night, Fernandez defiantly vowed not to submit to “extortion,” from NML Capital and others that have refused two opportunities to swap defaulted bonds for new, less valuable bonds that the government has reliably paid since 2005. But she also said she had been working on ways to keep Argentina’s commitments to other creditors.

    Her hard line came hours after the justices in Washington refused to hear Argentina’s appeal, and it could be a last effort to gain leverage ahead of a negotiated solution that both sides say they want. But with only days before a huge debt payment ordered by the court is due, many economic analysts and politicians say the country’s already fragile economy could be deeply harmed if she doesn’t immediately resolve the dispute.

    “By solving these issues and closing this chapter the country would benefit from higher capital inflows, which would likely translate into a positive impulse to domestic activity, a stronger currency, and rising, rather than declining, reserves,” said Goldman Sachs’ Latin America economist Alberto Ramos.

    “Another default can be quite costly economically and financially,” Ramos said. “And the uncertainty and volatility that would generate would put added pressure on an already struggling economy, on the exchange rate, and therefore also on reserves.” Ramos said he doesn’t believe that a potential default by Argentina would threaten the global economy, and that the regional impact would be very limited.

    Argentina’s Merval stock index had plunged 10 percent after Monday’s court decision, but recovered on Tuesday afternoon and was trading up 4.87 percent on hopes that the government will announce a solution to the debt issues. Argentina’s official peso currency opened trading barely changed Tuesday at 8.15 against the U.S. dollar and the black market peso also remained nearly unchanged as it traded at 12.35 to the greenback.

    Argentina’s Economy Minister Axel Kicillof had scheduled a news conference at 6 p.m. local time (5 p.m. EDT) to explain the Supreme Court’s decision and how Argentina’s government will proceed.

    Although Fernandez gave few hints about the government’s strategy, some analysts said they believe she has opened the door for a negotiated solution.

    “Our view is still that the government will negotiate given that the fear of a default is higher than the resistance to pay holdouts,” Eurasia Group analyst Daniel Kerner wrote in a research note on Tuesday. “Any decision that implies defying the ruling would put Argentina’s strategy to improve ties with foreign investors, the main plan the government has to make it to the end of (Fernandez’) term, in jeopardy.”

    Fernandez has strived to resolve unpaid debts with creditors to help Argentina return to global credit markets after being shut out since its 2001-2002 economic crisis and default. She and her late husband and predecessor, Nestor Kirchner, negotiated or paid off most of the country’s defaulted debt, nationalized the pension system, and retook control of the national airline and oil company.

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