July 30, 2014 / 11:51 AM / in 3 years

UPDATE 2-Argentine debt talks go down to the wire to avert default

(Adds surge in bond price, fund manager quote)

By Richard Lough

BUENOS AIRES, July 30 (Reuters) - Argentina was in a race against time on Wednesday to avert its second default in 12 years, needing either to cut a deal by the end of the day with holdout investors suing it or to win more time from a U.S. court to reach a settlement.

The Buenos Aires government said further negotiations with the hedge funds awarded $1.33 billion plus interest by a U.S. court would take place on Wednesday, but there was no confirmation from the office of mediator Daniel Pollack.

Argentine Economy Minister Axel Kicillof on Tuesday held the first face-to-face talks with the principals of the funds, who demand full repayment on bonds they bought at a discounted rate after the country last defaulted in 2002.

The government has until the end of Wednesday (0400 GMT on Thursday) to break the deadlock. If it fails, U.S. District Judge Thomas Griesa will prevent Argentina from making a July 30 deadline for a coupon payment on exchanged bonds.

Bank sources said a group of private banks in Argentina was working up a plan to offer up to $250 million as a guarantee to convince lead holdouts of the nation’s good faith and convince Griesa to re-establish the stay.

“Clearly, the banks are working on a credit contribution, a fund that could in some way facilitate the re-establishment of a stay,” Francisco Ribeiro Mendonca, CFO of Banco Piano, told local radio station Today Radio Del Plata.

Representatives from Banco Piano are among a delegation from Argentina’s banking association, known as Adeba, that has travelled to New York to join the talks.

BONDS JUMP

Argentina’s key dollar bond due 2033 jumped on Wednesday, and its debt insurance costs fell as investors took some cheer from Tuesday’s meeting.

The 2033 dollar discount bond surged as much as 11 points from Tuesday’s close to a bid price of 93.52, according to Thomson Reuters data.

The country’s five-year credit default swaps fell 43 basis points from Tuesday’s close to 1,856 basis points, according to Markit. The CDS had hit six-week highs on Tuesday.

Argentina’s one-year credit default swaps dropped 51 basis points from Tuesday’s close to 4,708 basis points.

“It’s trading like there’s a deal,” said a fund manager who holds Argentina’s restructured debt and requested anonymity. “I don’t have information, but someone knows there’s a deal.”

Latin America’s No. 3 economy has for years fought the hedge funds that rejected large writedowns, but after exhausting legal avenues, it faces default if it cannot reach a last-minute deal.

The Buenos Aires government has pushed hard for a stay of the U.S. court ruling that triggered Wednesday’s deadline.

Kicillof’s unexpected appearance in New York raised hopes that there was still time to avoid a default that would bring more pain to an economy already in recession, though not the economic collapse seen in 2002 when it defaulted on $100 billion in debt.

Argentina’s chances of obtaining a stay were boosted on Tuesday when holders of Argentina’s euro-denominated exchanged bonds said a suspension would encourage a settlement.

They also said they would facilitate a deal by waiving the so-called RUFO clause that prevents Argentina from offering other investors better terms than it offered them.

Argentina has consistently argued the RUFO clause prohibits it from settling with the holdouts.

“Obtaining a waiver of the RUFO clause, however, will take time,” the group of bondholders said in an emergency motion for a stay filed on Tuesday.

While unnerving, the debt crisis is a far cry from the turmoil of Argentina’s record default in 2002 when dozens were killed in street protests and the authorities froze savers’ accounts to halt a run on the banks.

An Argentine default was unlikely to prompt broader market repercussions, given the country’s relative isolation from the international financial system. (Additional reporting by Alejandro Lifschitz in Buenos Aires and Daniel Bases in New York; Editing by Lisa Von Ahn)

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