Mauricio Macri took office as Argentina’s president in December promising to bring economic reform to a country that has suffered from currency controls, market interventionism, and international isolation. Macri has acted quickly on some counts, and his country may yet find itself welcomed back to international credit markets if Argentina can reach agreement with foreign bondholders.
As Argentina and its bondholders again begin discussions on debt restructuring, InsideSources has obtained a memo advising Macri on negotiation strategy. The memo was authored by the Inter-American Development Bank (IDB), which is the leading source of development financing for Latin America and the Caribbean. The bank has faced pressure as the U.S. has used its 30 percent share in the IDB to vote against loans to Argentina until the country resolves its debt troubles. The U.S. failed to block the loans.
The memo, originally written in Spanish, is dated December 2015, though its guidance could be a topic of discussion this week as Macri and IDB president Luis Alberto Moreno are likely to meet while in Davos for the World Economic Forum. IDB has an interest in resolving the debt dispute quickly and with terms favorable to Argentina in order to avoid any embarrassment from its continued lending.
A settlement will be a “critical step towards full normalization of the relations of Argentina with the international financial community,” says the report, and it urges Argentina to abide by international principles for sovereign debt negotiations endorsed by the G20 and United Nations.
The memo recognizes that Argentina might receive a haircut on its payments, but the IDB also says Argentina has the ability to pay what it owes. “Contrary to what is typical in debt restructuring cases, it is difficult for Argentina to argue about the haircut on the basis of capacity to pay, or solvency,” states the IDB. Argentina, however, could attempt to strengthen its hand in the negotiations, explains the memo, by requiring that the deal receive the approval of the Argentine Congress.
As Argentina negotiates haircuts, the report discourages any attempt to distinguish between interest and principal. The IDB writes: “It would be a strategic error for Argentina to try to negotiate different haircuts for original nominal value and accrued interest. It is almost certain to be a futile effort that would only consume time, given that all the claims have equal legal status.”
IDB provides advice on a wide range of issues involved in the negotiations, including displaying good faith, the interests of all the parties, and the logistics of negotiating with multiple parties.
Additionally, while Argentina had previously been opposed to the appointment of a Special Master to facilitate negotiations, the memo advises the government to accept the role of the Special Master, “who does not fulfill any special function as mediator or arbiter, but acceptance of whom would be a demonstration of good will to the judge.”
It’s hard to predict how much of the memo’s guidance Argentina will follow. The document advises Argentina to agree to confidentiality for the discussions and the proposals that are formulated. Just last week, Argentina announced all negotiations must be public.
