Argentina moves to increase financing options ahead of debt talks

BUENOS AIRES (Reuters) - Argentina has swapped $16 billion in non-negotiable notes held by the central bank for U.S. dollar-denominated bonds, as the country moves to bolster currency reserves and strengthen its hand against creditors suing over defaulted debt.

Long-awaited negotiations with a group of New York hedge funds that sued in the U.S. courts for full repayment of defaulted sovereign bonds are set to start in the days ahead.

The central bank also is talking with investment banks about a financing deal of up to $7 billion, another part of its push to shore up foreign exchange reserves that were run down by previous President Cristina Fernandez. The free-spending interventionist Fernandez was succeeded last month by Mauricio Macri who is moving to more free-market policies.

The new bonds mature in 2022, 2025 and 2027, the government said on Wednesday. They were traded for non-transferable notes that a previous government owed to the central bank and matured at the start of the year.

“The notes had to be transferred into bonds before they could be sold as a way of increasing central bank reserves,” said Fausto Spotorno, an economist with local consultancy OGF.

“The central bank could also try to use them as collateral for a loan, at least in the local market and perhaps with the international investment banks,” Spotorno said.

The outlook for currency reserves has improved enough over recent days to take pressure off the country’s effort to clinch a bank financing deal, two sources close to those talks told Reuters.

The hedge funds, known as “holdouts” for having rejected the roughly 70 percent repayment cuts offered in Argentina’s 2005 and 2010 bond restructurings, are expected to fight any bank loan deal until their suit is settled.

The case has dragged on for years while Fernandez refused to negotiate with funds she dismissed as “vultures,” hamstringing Argentina’s finances by keeping it locked out of the global bond market.

The debt saga started with a 2002 crisis that threw millions of middle-class Argentines into poverty. Many were helped by the generous welfare spending of Fernandez, who ruled from 2007 until last month. But her interventionist policies took a toll in the form of wide deficits, low reserves and high inflation.

Banks involved in the financing talks include HSBC Holdings Plc, JPMorgan Chase & Co, Goldman Sachs Group Inc, Deutsche Bank AG and Citigroup Inc, according to sources familiar with the negotiations.

Macri won the November election on promises of rejuvenating the economy by opening local markets after years of strict currency and trade controls.

His policies sparked a pre-Christmas one-day currency drop of 26.6 percent. This spurred exports and increased dollar inflows, which along with a currency swap with China has started to shore up central bank reserves.

Reserves have risen by about $1 billion to $25.5 billion since Macri’s Dec. 10 inauguration.

“Negotiations with the banks remain open, but now there is no urgency,” one of the sources said on Tuesday. “No amount has been set and no terms have been agreed upon.”

Additional reporting by Gabriel Burin and Jorge Otaola; Editing by Bill Trott and Clive McKeef