PARIS/BUENOS AIRES, (Reuters) – Argentina reached an agreement yesterday with the Paris Club of creditor nations on repaying overdue debts in a landmark deal that helps the country put its record default behind it and should open up much-needed sources of international financing.
The Club said the deal, reached in the early hours of the day in Paris, would allow Argentina to clear around $9.7 billion of arrears over the next five years.
Faced with an ailing economy and dwindling foreign reserves, Argentina has been on a push since late 2013 to resolve disputes with creditor nations and foreign companies in order access fresh funds and attract investments to its massive shale resources.
The country has been virtually shut out of capital markets since its 2001/02 default on roughly $100 billion.
“Argentina is continuing its path of regularizing and paying off the debt that 40 years of neoliberalism left us,” Argentine Economy Minister Axel Kicillof told an Argentine radio station from Paris.
Argentina wrung a major concession from the Club by avoiding any International Monetary Fund involvement in the deal, which the creditor group usually requires.
President Cristina Fernandez’ government, which has publicly lambasted the IMF, would have lost credibility if it had accepted an IMF program or audit.
The deal is a key step towards lowering borrowing costs for Argentina that have been too high, in double digit figures, for it to consider issuing new foreign debt since its default.
Argentina’s sovereign bond yield spreads over US Treasuries tightened 10 basis points to 840 points on the EMBI Global index. Its main 2017 dollar bond was marginally firmer, rising slightly off two-month lows.
The main challenge for Argentina to regain access to markets however is a long-running battle with “holdout” bondholders who have declined to participate in its debt restructurings.
The U.S. Supreme Court is expected to decide in coming weeks whether to take on the case. If it does not, Argentine officials have said the country may be forced into a technical default.
A TRIUMPH FOR ARGENTINA?
Argentina is eager to secure a deal that does not put too much strain on its balance of payments. Its central bank reserves stand at just $28.5 billion and the economy is expected to fall into recession this year.
Offering Argentina some breathing room, the Paris Club agreement calls for a repayment in instalments, with the first one of $650 million due this July, Argentina’s government said. The second tranche, of $500 million, should be made in May 2015.
“It seems a good deal for Argentina, both in terms of the seemingly generous repayment profile and the fact that they seem to have reached an agreement much sooner than I expected,” said Stuart Culverhouse, head of research at Exotix, a frontier markets broker in London.
“The hit to reserves appears light in the near term, which will reassure exchange bondholders.”
The Paris Club said the deal cleared the way for export credit agencies of its members to resume doing business with Argentina. Foreign investment is key for it to develop its vast Vaca Muerta shale field.
Argentina and the Paris Club came close to a deal in 2008 but the government pulled out at the last moment, concerned about its falling reserves amid the global financial crisis.
Germany is Argentina’s biggest Paris Club creditor with about 30 percent of the debt, followed by Japan with about 25 percent. Smaller holders include the Netherlands, Spain, Italy, the United States and Switzerland.