Argentina Agrees to Pay Off Bondholders, Shake Off “Financial Pariah” Status

The passage of the bill paves the way for the government to take out up to $12.5 billion in loans to settle with the hedge funds.

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Argentina’s lawmakers have approved a bill designed to pay off the foreign bondholders, putting an end to the 15-years-old dispute that made the once-wealthy South American nation a pariah in the international capital market. President Mauricio Macri’s administration has called the deal bitter but necessary medicine to drive the country out of its economic mess, largely blamed on the previous government.

The new bill allows the government to take out up to $12.5 billion in loans to settle with the two U.S. hedge funds that sued it — Aurelius Capital Management and billionaire speculator Paul Singer’s NML Capital — as well as other remaining holdouts.

With only weeks to go for Argentina to pay the bond holdouts, many analysts doubted that the lawmakers would pass the bill. But President Macri had warned lawmakers that a “no” vote would condemn Argentina to remain a “financial pariah” shunned by global credit markets.

Reports say even several opposition senators voted for the bill as they had been caved in to pressure from the governors of their provinces, who need access to loans to fund infrastructure projects.

Strapped for cash, Argentina badly needed to have its pariah status removed, because while its neighbors are able to borrow with interest rates of about 5%, Argentina has been forced to pay at least double.

Therefore, paying off bondholders was the only way out of the economic crisis. The issue dates back to 2002 when Argentina defaulted on bond repayments.

The South American country successfully persuaded some of its bondholders to accept nearly 70% reduction in the value of their investment. More than 92% of the many creditors agreed to the offer, but nearly a dozen hedge funds refused.

Some of these hedge funds, which previous administrations in Argentina dubbed “vulture funds,” had bought up debt worth $1.3 billion. What complicated things, however, was the total sum of debt ballooned, and legal fees mounted, as holdout funds sued the government in the U.S. courts, which eventually ruled in their favor.

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For years, Argentina argued that the funds bought most of the debt at a deep discount and paying off such a huge sum would push its economy back into a turmoil.

Early in the twentieth century, it was one of the richest countries in the world and the third largest in the Southern hemisphere. Today, the growing debt, rising inflation and a weak currency are plaguing its economy.

Now all that’s set to change again. Since taking office in December, President Macri has rolled back Cristina Fernandez’s export taxes and lifted currency controls to let the peso float freely. Since Argentina has strong human resources and infrastructure, making it wealthy again may not be a gigantic task for Macri.

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