Crunch time for Argentina fixing its debt default will almost certainly not be January, as many investors had hoped, but a year later once the country's next president takes office and tries to get the ailing economy moving again.
The South American country is locked in a battle with a group of U.S. hedge funds over unpaid debt. Despite a U.S. court order to fully repay the $1.3 billion debt plus interest, Argentina insists the hedge funds accept reduced payment.
The standoff has put a chokehold on investment in Argentina as the economy stagnates under the weight of tough trade and currency controls.
In July, Argentina tipped back into default, as President Cristina Fernandez vowed never to pay the face value of the bonds to the funds she derides as "vultures". The funds, in turn, have declined her offer of payment under terms of the bond swaps that followed Argentina's record default in 2002.
The debt restructuring contract contains a clause that Fernandez has invoked to refrain from hiking the payment offer. Expiration of the RUFO clause on Dec. 31 would allow her to boost the offer in 2015, but she remains opposed to the idea.
That leaves Argentina's presidential election in October as the next likely turning point in the decade-long dispute, as the constitution prohibits Fernandez from running for another term.
"They said that after the RUFO clause was no longer an issue on Jan. 1 we would run back to talks. But these vultures are losing their feathers," Fernandez told thousands of supporters shortly before the Christmas holiday.
"And you know what, I reckon they're going to end up looking more like clowns than vultures," she said in a speech laced with frothy nationalist rhetoric.
FEWER INCENTIVES
Since the July default, government intervention in the economy has reversed a sharp weakening of the black market peso and shored up foreign reserves. This could give Argentina enough financial flexibility to limp through until the Oct. 25 vote.
While an attempted dollar bond top-up flopped this month, it underlined Argentina's willingness to pay a high price to ease a liquidity crunch rather than settle with the funds.
Some believed Fernandez's unwillingness to negotiate may be posturing ahead of the RUFO clause's expiry in a bid to force concessions from the holdout investors led by billionaire Paul Singer's NML Capital Ltd and Aurelius Capital Management.
But a source in the economy ministry who asked not to be named said: "Nothing is going to change on Jan. 1, nor on Jan. 2. Or the 3rd. Or the 4th."
So expectations for a settlement have shifted to after a new Argentine president is installed in December 2015.
"No deal with holdouts under Fernandez. Soonest is the next administration," said Siobhan Morden, head of Latin America strategy at Jefferies. "It would have to be a crisis to motivate (her) and even then I'm not sure she wouldn't try to find other alternatives to avoid holdout talks."
NEXT GOVERNMENT'S PROBLEM
Wall Street views the front runners, Daniel Scioli, Mauricio Macri and Sergio Massa as more market-friendly than Fernandez and the holdout investors may be tempted to hunker down and wait for the new administration.
All three aspirants favor a deal to revive investment. But they have been cautious about criticizing Fernandez, since many voters agree with her view that the funds are out to cripple the Argentine economy in pursuit of huge profits.
Another factor is the U.S. judge at the center of the courtroom battle and his appointed mediator.
Judge Thomas Griesa appears to have few means to force Argentina to obey his orders even after the RUFO clause expires. He has already ruled Argentine in contempt, to little effect.
But he has authorized mediator Daniel Pollack to grant a seat at the negotiation table to other investors who spurned the 2005 and 2010 bond swaps. This could mute Argentina's argument that it must settle with all holdouts and not one small group.
If Argentina is seen as dodging negotiations, it faces the risk of exchange bondholders demanding the accelerated payment on the principal and interest due on their investments.
Still, bondholders may hesitate in pulling the trigger. An acceleration could leave the country facing claims of up to $30 billion, almost all its foreign reserves. This would hugely complicate efforts to put its decade-long debt woes to rest.
"It is not clear who is going to blink first," said Stuart Culverhouse, head of research at Exotix, a frontier markets broker in London. "It therefore probably becomes the next government's problem."
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