September 10, 2014

The Argentinian Congress passed a law that allows the government to pay its U.S. bonds locally or in France on 11 September. The bill also offers investors who participated in the 2005 and 2010 debt restructuring the opportunity to swap their foreign-denominated bonds for other bonds issued under Argentinian legislation. The government is attempting to circumvent U.S. District Judge Thomas Griesa’s ruling that the country must fulfill payment to both regular creditors and holdouts at the same time. As the country could not settle a deal with the holdouts, Argentina defaulted on its debt for the second time in 13 years on 30 July.



Following the approval of the law, the government replaced the Bank of New York Mellon as the trustee for Argentina’s debt obligations with Nacion Fideicomisos, a unit of state-owned Banco Nacion. With this move, the government has paved the way for the country to make a USD 200 million coupon payment to regular bondholders on 30 September and has avoided paying the holdouts, at least for now.



While Economy Minister Axel Kicillof acknowledged that bondholders have shown little interest in the proposed plan, analysts warn that the current impasse regarding Argentina's debt poses additional inflationary and exchange rate pressures. As Alberto Ramos Co-head of the Latin America Economic Research team at Goldman Sachs, points out:



“Without the prospect of the central government being able to tap international markets during an electoral year, we expect the relentless monetization of a growing fiscal deficit to continue to drive inflation and exchange rate pressures. Under this scenario, the Central Bank would have to keep increasing interest rates and accelerating the depreciation drift of the currency to diminish the risk of a sharp contraction in the demand for money, characteristic of the recurrent balance-of-payments crisis that the country has experienced in recent history.”



The Central Bank limited the number of people who can purchase U.S. dollars on 5 September as Argentina’s international reserves are dwindling due to the sovereign-debt default and an increase in the pressure on the Argentinian peso. The Bank increased the minimum income a person must have in order to legally buy up to USD 2,000 from 7,200 pesos to 8,800 pesos. Foreign-exchange reserves, which are partially used to pay creditors, currently stand at USD 28.5 billion. This is just a fraction of the USD 52.6-billion peak recorded in January 2011.

FocusEconomics panelists expect international reserves to decline to USD 25.8 billion in 2014. Next year, the panel sees reserves falling further to USD 20.0 billion.