29 July 2014 | 16:16

With new default looming, Argentina urges calm

Argentina admitted it may default on some of its debts but downplayed the consequences, just two days before time expires in negotiations with hedge funds demanding full payment on their bonds, AFP reports.

Argentina admitted it may default on some of its debts but downplayed the consequences, just two days before time expires in negotiations with hedge funds demanding full payment on their bonds, AFP reports.

Argentine officials traveled to New York to take a fresh stab at breaking the impasse with the so-called holdout hedge funds, who refused to join the restructuring plan reached after Buenos Aires stopped paying its more than $100-billion debt in 2001, the largest default in history.

A US judge has blocked payments on the restructured debt as long as Argentina refuses to pay the holdouts, which it brands "vultures."

But with no visible progress in talks with the holdouts, President Cristina Kirchner's chief of staff, Jorge Capitanich, said the country could fail to make a $539-million payment on the restructured debt by the Wednesday deadline.

"Argentines need to stay calm, because life goes on," he told a news conference, promising the government would "guarantee that the economic system continues to function."

As Kirchner set off to rally support at a summit of South American leaders Tuesday in Venezuela, another top official in her office also dismissed grim predictions on the economic impact of a default.

"Nothing is going to happen," said Oscar Parrilli, secretary general in the presidency.

The US court-appointed mediator overseeing the talks in New York, lawyer Dan Pollack, said he would hold new meetings with the Argentine delegation Tuesday.

"I again urged direct, face-to-face conversations with the bondholders, but that will not happen tomorrow," said Pollack, who has tried to get the sides to sit down together and accuses the Argentines of refusing to do so.

Pollack sought to inject new urgency into the process, referring to "the gravity of this situation and the shortness of time to resolve it without default."

Argentina, the third-largest economy in Latin America, has been trapped in a Catch-22 by US District Judge Thomas Griesa's ruling in favor of hedge funds NML Capital and Aurelius Capital Management.

Under the ruling, it cannot pay the 92 percent of creditors who agreed to the restructuring of its debt without also paying the hedge funds the entire $1.3 billion it owes them.

But the restructuring plan could fall apart if Argentina pays the hedge funds in full, as it could unleash a flurry of claims for equal treatment by other creditors who had agreed in 2005 and 2010 to take a 70 percent haircut on their bonds.

If Buenos Aires fails to cut a deal allowing it to make a payment on the restructured bonds by midnight Wednesday -- when its grace period expires -- ratings agencies will declare the country in default for the second time in 13 years.

Dire forecasts

Analysts warned a new default would only exacerbate the problems facing the Argentine economy, which is likely in recession already.

"An economic contraction of 3.5 percent, annual inflation of 41 percent and a drop in consumption of 3.8 percent will be the indicators at the end of 2014 in the event of a default," consultancy Abeceb.com said over the weekend.

Carlos Caicedo, Latin America analyst at IHS Country Risk, said a default could force another devaluation of the peso -- already devalued 20 percent in January -- which would in turn fuel inflation, with prices already up 15 percent in the first half of the year.

Nevertheless, "Argentine authorities seem to have reached the conclusion that to default now and renegotiate later would be the less costly option," he said.

Argentina has so far taken a defiant approach to negotiations, insisting the only possible solution is for the judge to suspend his ruling until the end of the year.

That would take the talks beyond the expiry date for the clause in the restructuring deals that entitles all bondholders to equal treatment, known as a Rights Upon Future Offers, or RUFO, clause.

Meanwhile, Argentina announced Monday that it had made a $642-million payment to the so-called Paris Club of wealthy nations with whom it reached a deal in May to clear nearly $10 billion in debt arrears.

But analysts say that with reserves that currently stand around $29 billion, the country has little room for maneuver as it seeks to placate all its creditors.