BUENOS AIRES, July 8 Argentina's top presidential candidates say a deal to avoid a debt default is essential for their economic reform programs but they are not attacking the government's hard stance against "holdout" investors because it could be political suicide.
Three main front runners have emerged ahead of next year's election. All are more business-friendly than outgoing President Cristina Fernandez, a fiery populist who denigrates holdout hedge funds suing Argentina as "vultures" out to bankrupt the government in their pursuit of huge profits.
Many voters share her view of the funds, which bought Argentine bonds on the cheap and then held out for better terms when Argentina restructured its bonds after a massive default in 2002. The funds have won a string of U.S. court decisions in their quest to be repaid for the full value of the debt.
The government is running a publicity campaign against the holdouts that includes frothy, nationalistic spots run during Argentina's World Cup soccer matches. Posters on the streets of Buenos Aires drive home an "us against the vultures" theme.
Fernandez has nonetheless been forced to enter debt talks in New York this week. If a deal is not clinched by July 30, Argentina would fall into its second sovereign default in 12 years.
Buenos Aires Governor Daniel Scioli, the capital city's Mayor Mauricio Macri and Congressman Sergio Massa are the leading candidates ahead of the October 2015 election, although none have formally thrown their hat into the ring.
All favor a negotiated settlement with the funds as a way to unblock much-needed energy investment and global bond financing to take pressure off depleted central bank reserves.
But none of the candidates have offered a specific plan for negotiations or said what they would do if they were in power.
"I am confident that a solution can be found and that we can normalize our relationship with the international markets, defending our country, but defending it intelligently," Scioli said recently, taking care not to criticize Fernandez, who leads his branch of the Peronist party.
Martin Redrado, a former central bank chief and now an advisor to Massa, is critical of Fernandez's handling of the economy, which is now in recession after a decade of strong growth, shrinking under the weight of high inflation and heavy-handed currency and trade controls.
"There is no objective reason for Argentina to fall into default," Redrado said. "It is through unfortunate policy improvisation and arrogance on the part of the government that we have fallen into this situation. But it is a solvable situation."
The candidates and their advisors are careful not to appear to side with holdout investors. While Argentines want a deal that staves off default and many oppose Fernandez's economic policies, there is little or no support for the funds.
The holdouts refused to accept the terms of restructuring deals in 2005 and 2010, in which more than 92 percent of bondholders agreed to receive less than 30 cents on the dollar. They now want full repayment of $1.3 billion plus interest although they say they are willing to negotiate.
"Argentina needs to come to terms with creditors who did not participate in the debt restructurings, as a step towards returning to international capital markets," said Juan Curuchet, a banker who is advising the Macri campaign.
Bond yields have moved lower as the government is broadly expected to reach an arrangement, but the risk of default cannot be dismissed.
If it settles with holdout funds and the deal does not impose crippling conditions on the next government, Argentina could return to international capital markets while Fernandez is still in office, providing a cushion of stability for her successor.
A new default, however, would heap more financial pressure on an already anemic economy. Scioli's candidacy could suffer as he is seen as closest to Fernandez while Massa and Macri might come out swinging against Fernandez's handling of negotiations.
"Whoever succeeds Fernandez will have to deal with a heavy legacy of accumulated imbalances. To add a default to that inheritance would make the job much more complex," said a local analyst who advises investors and asked not to be identified.
Redrado, whose tenure as head of the central bank ended in 2010 when he refused to allow Fernandez to use its dollar reserves to fund high-spending policies, says Massa would align fiscal and monetary policies to rein in inflation, which is now running at about 30 percent.
Loosening currency controls would help boost energy investment as Argentina struggles to develop its vast shale oil and gas fields in Patagonia, Redrado said.
The U.S. courts have ruled that Argentina may not make any more payments to the holders of its restructured paper without first reaching a deal with the holdouts. The United States has jurisdiction under the original bond contracts.
A coupon payment to holders of restructured debt was due on June 30. Argentina deposited $539 million into the Bank of New York Mellon but U.S. District Judge Thomas Griesa blocked payout. A 30-day grace period leaves the government until July 30 to negotiate a deal with hedge funds led by Elliott Management Corp.
Deals with the Paris Club of creditor nations to pay back almost $10 billion in debt and with Spanish major Repsol to compensate it for the nationalization of energy company YPF sent Argentine bonds and equities climbing earlier this year.
Argentine country risk has shed 128 basis points to 680 over safe-haven U.S. Treasuries this year, according to JP Morgan's Emerging Markets Bond Index Plus. The index as a whole stands at 274 basis points, narrower by 59 basis points. So far this year, Argentina's portion of the EMBI+ has returned 20.42 percent to investors while the index overall is up 9.47 percent.
Massa, Scioli and Macri say they want to keep the positive momentum in part by lifting Fernandez's foreign exchange controls, which keep dollars out of the hands of businesses and savers and impede investors from getting their money back.
"In order to entice domestic and foreign investment," said Macri's advisor, Curuchet, "investors need to have the possibility to cash out." (Additional reporting by Daniel Bases in New York; Editing by Richard Lough and Kieran Murray)