| BUENOS AIRES, July 8
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
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
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
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
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
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
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)