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ECONOMY | 13-09-2019 15:55

The US$185-million bond payment that's overdue and stuck in Argentina

Real-estate firm IRSA has the cash to cover a bond payment to foreign and local creditors. But then capital controls arrived – and everything got a lot more complicated...

It was the kind of transaction that would have been mundane just a few weeks ago in Argentina: a company owed a bond payment to foreign and local creditors. It was a large payment, US$185 million in principal alone, but the company, a real-estate firm called IRSA, had plenty of cash to cover it.

When it turned over the money to the firm processing the payment, though, things got complicated. Under the new currency rules imposed by the government to try to staunch dollar outflows and stabilise the peso, the cash couldn’t be sent to creditors’ overseas accounts. As the payment was coming due September 9, the firm, Clearstream, began releasing a series of statements confirming the money was, at least temporarily, frozen.

All of which has added another layer of confusion and worry to markets in a country already paralyzed by a financial crisis that has the government on the cusp of default for the third time in the past 20 years. Among the most pressing questions traders and investors were grappling with Friday was whether this blocked payment was a technical glitch that the government would resolve soon or a more permanent feature of the controls that would imperil payments by other companies and the government itself in coming weeks.

For the time being, most observers seemed willing to wait the situation out, expecting that Argentine officials will quickly tweak the rules so as to avoid corporate bond defaults.

“Argentina doesn’t want an accidental default” and will fix the problem by tweaking the rules, said Siobhan Morden, the head of Latin America fixed income strategy at Amherst Pierpont Securities in New York.

At this stage, it appears this snag in the payment chain will affect dollar bonds governed by local laws rather than foreign-law bonds where payments are made directly abroad. Companies, provinces and the federal government often sell both types of notes -- those that are subject to New York law and those under domestic regulations.

A Central Bank official, who asked not to be identified, said the capital controls announced this month do indeed limit these sorts of local transactions. Non-resident holders of local-law bonds need to be paid locally, and rules limiting overseas dollar transfers to $1,000 a month apply to them, the person said.

IRSA’s US$71 million of notes due in July 2020 were little changed Friday at about 86.8 cents on the dollar. Securities from oil producer YPF due in 2021 fell two cents to 82.8 cents on the dollar, while the government’s century bonds due in 2117 fell 1.4 cents to 42 cents on the dollar.

Of course the bond payment hiccup is only the latest in the list of recent disasters for Argentine investors. Assets have tumbled since an August 11 primary vote showed the opposition was likely to unseat the business-friendly President Mauricio Macri in October elections. The peso has weakened almost 20 percent since the ballot, prices for the century bond fell by almost half and the Merval stock index lost 46 percent in dollar terms.

Capital controls are blunt instruments and frequently need to be revised as authorities discover surprise implications and loopholes, according to Dirk Willer, an analyst at Citigroup Inc. Officials want to preserve the country’s foreign reserves, but likely want companies to be able to repay debts, he said.

“This is likely an unintended consequence of the controls and will likely be revised,” Willer wrote in a note to clients.

by Carolina Millan, Pablo Gonzalez & Ben Bartenstein, Bloomberg

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