Argentina appears to have reached a deal with its creditors after having spent more than a decade in financial limbo. NML Capital and Aurelius Capital Management, two funds that hold some of Argentina's defaulted foreign debt, announced as much Wednesday, and with the announcement comes two important developments: NML and Aurelius may eventually be able to receive payment for what they are owed, and, more important for Argentina, the government in Buenos Aires will be able to borrow abroad freely.
NML and other creditors had previously refused Argentine debt restructuring offers, and a lengthy legal dispute ensued. This, combined with Argentina's insistence on not paying these and other bondholders — colloquially referred to as holdouts — led to a U.S. court decision to block Argentina from making payments on foreign debt in 2014.
Concluding a deal with NML and other creditors is crucial for Buenos Aires because it affords Argentina access to more foreign capital. Without substantial foreign lending, Argentina is unable to adequately finance its development, at least in the near to medium term. Buenos Aires now intends to repeal a domestic law preventing the country from making deals with holdout bondholders — an arrangement entirely separate from any deal reached with previous creditors. Barring last-minute mishaps, the pieces are set for Argentina to restore some semblance of normalcy to its relationships with foreign financial institutions.
With this agreement in place, Argentina hopes to close a major rupture in its recent political history. The move would erase one of the lasting drivers of populism in domestic Argentine politics. Understanding the influence and scope of the lengthy battle between bondholders and the government is key to understanding why Argentina behaved in the manner it did, and how that behavior changed over time.
Argentina defaulted on nearly $82 billion in foreign debt in December 2001. The default triggered an economic and political crisis that severely reduced Argentines' standard of living for several years. It also kicked off nearly 15 years of legal disputes between the government and foreign creditors holding the debt that Argentina defaulted on. In separate negotiations in 2005 and 2010, Argentina managed to restructure some of its defaulted debt. Some bondholders, including NML, did not join these processes. Instead, they sued Argentina for the full value of their bonds. For a while, however, Argentina was able to ignore these demands.
And so, for the better part of a decade, Argentina relied mainly on rising commodity prices to boost its economy. Argentine agricultural exports such as soybeans, wheat and corn commanded increasingly higher prices abroad throughout the 2000s. The political fallout from the foreign debt default gave the governments of Nestor Kirchner and his wife, Cristina Fernandez de Kirchner, the political mandate to pursue a very populist policy at the expense of economic stability. Giving in to the holdouts and quickly settling the issue of outstanding debt was simply not a politically palatable option — let alone a political priority — for Buenos Aires under the Kirchners.
The issue came to a head in 2014, when the Argentine government exhausted its final appeals against the holdouts and was blocked by a U.S. court from making foreign debt payments. With barely a year and a half left in her term, Fernandez simply left the issue for the next president to resolve.
Now, President Mauricio Macri is tasked with settling the issue with the bondholders. A settlement will undoubtedly be unpopular with the Argentine left. It may also rankle certain legislators from Fernandez's opposition Front for Victory. The opposition could realistically delay a settlement by refusing to repeal the so-called lock law, which prevents Argentina from offering different terms to bondholders not included in previous restructurings. However, it is more likely that the issue of the lock law will involve some negotiation over domestic issues. This makes more sense than letting the issue devolve into a conflict between the Front for Victory and Macri's Cambiemos coalition.
With the bondholder dispute on the verge of being concluded, Macri's priorities lie with longer-term economic development. Macri has already taken a major step forward by lifting currency controls and allowing money to flow freely in and out of the country. But the president's next four years will be a transitional period in which public spending will be cut, further investments from abroad will be encouraged and subsidies will be slowly phased out. Yet there are still many uncertainties ahead for Argentina. The removal of subsidies could raise inflation even higher than it is already, in turn risking social unrest spearheaded by the poorer classes most affected by price hikes. Argentina will also encounter slower global commodity markets than before, in addition to a tumbling Brazilian economy and a much slower Chinese economy.
Still, Argentina has set its plan for future growth in motion, and that plan includes putting an end to the debt dispute. Buenos Aires is at the start of an economic transition, and closing the door on the debt issue is a key part of moving that transition forward.