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Argentina signals hard line in debt negotiations

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      By Emerging Markets Debt TeamEaton Vance Management

      Boston - When the Peronist movement was formally voted back into power in Argentina last October with the election of Alberto Fernandez as president, one immediate concern of investors was how the new administration would deal with the country's unsustainable debt burden.

      As we noted in an earlier blog, Fernandez had indicated that he does not want a hard default on the country's obligations - more than $100 billion in sovereign debt the country is unable to repay. His advisors signaled that the new president preferred a "market-friendly" restructuring, and the administration is currently preparing for negotiations with creditors.

      Developments last week suggest that the initial concerns of investors may have been well founded. Economy minister Martin Guzman stated over the weekend that the federal government would not step in to help Buenos Aires province, which is also struggling with debt payments.

      Axel Kicillof, new governor of the Buenos Aires province and former Argentina finance minister, initially gave creditors until Wednesday of last week to accept a three-month delay in the repayment of $250 million in foreign debt issued by the province. The debt was originally scheduled to be paid on January 26. The deadline was extended to January 31 for creditors to accept the delay.

      Investors were surprised by Kicillof's decision, as they expected Argentine authorities to honor debt payments during negotiations to restructure the nation's sovereign debt. The province's bonds fell in value, and the country's debt weakened as well. Argentina was removed from the J.P. Morgan Government Bond Index - Emerging Markets (GBI-EM) benchmark at the end of November after capital controls made its bonds ineligible for index inclusion.

      Bottom line: Statements by Guzman and Kicillof indicate that the administration is staking out a hard line as it prepares to negotiate over the country's debt. Creditors who are ready to dismiss this as an opening gambit should recall that Argentina has already defaulted eight times. Hopes for a "market-friendly" debt restructuring may prove illusory.