Argentina has reached a preliminary agreement to end one of the longest and most contentious battles over government debt in history, potentially handing a big payday to hedge funds that held out for a decade and a half.
The government agreed in principle on Sunday to pay $4.65 billion to Paul Singer’s Elliott Management Corp. and three other hedge funds to settle their claims on the country’s defaulted sovereign bonds, according to Daniel Pollack, a mediator charged by a U.S. judge with overseeing settlement of the dispute.
The agreement still has to clear a number of hurdles, including winning approval of the Argentine congress and heading off legal challenges from any creditors who don’t cut a deal. But if completed as envisioned, it would pay about 75% of what the hedge funds have said Argentina is obliged to pay, several times more than they actually invested in the debt.
Torino Capital, a New York-based investment bank, said the hedge funds will likely reap between 10 to 15 times what they initially paid for the bonds. That figure, which is based on the assumption that they bought the debt at about 20 cents on the dollar, is in line with other analysts’ estimates. The settlement includes accrued interest and lawyers fees.
A deal also would be a victory for Argentina’s new president, Mauricio Macri, who made settling the dispute among his priorities during the campaign. He wants a deal so Argentina can raise new capital from foreign bond offerings to help stimulate its depressed economy.
The ruling party has only a small number of legislators, and Mr. Macri will have to reach across party lines to get the votes he needs, analysts said. Still, pollsters said that after 15 years of stalemate, public opinion is coalescing around a deal that would allow the country to borrow again.
“More than 60% of the Argentine people think a settlement will be very beneficial to the Argentine economy,” Alejandro Catterberg, director of polling firm Poliarquia Consultores, said on Monday.
Karina Sapini, a 24-year-old hairdresser, said Argentina needs to pay its debts and backed a deal with bondholders. “It’s like at my business,” she said. “If I don’t pay for my shampoo and conditioning products, my providers will stop selling them to me.”
Argentina stopped payment on more than $80 billion of debt in 2001, the largest government default at the time. An overwhelming majority of bondholders, 93% in all, settled for 30 cents on the dollar, leaving the remainder of holdouts to battle for more.
The new willingness to settle represents a sea change for the government and for Argentine citizens battered by years of economic weakness. Argentina’s previous administration had taken a hard-line stance with the hedge funds, calling them “financial terrorists” and vowing not to give in to their payment demands.
“We are pleased to have reached an agreement with Argentina,” a spokesman for Elliott Management said. Elliott and other bondholders have declined to comment on their profits or when they acquired the defaulted debt.
On Monday, some legislators already were criticizing the deal. “This is a barbarity,” said Congressman Claudio Lozano, calling on the government’s auditing agency to study the agreement. “We want all the information about this before voting on it.”
The dispute was dubbed the “trial of the century” by analysts, who said a successful settlement will set important precedents. The outcome upends the conventional wisdom that bondholders have little recourse if a government defaults on its debt. The pact raises the likelihood that a minority of bondholders could be successful in the future in isolating a government from broader credit markets to force payment.
The lengthy battle was possible, because the bonds were sold to investors without collective action clauses, which would have forced minority holders to go along with a settlement if the bulk of the creditors agreed.
Argentina isn’t an isolated case in that regard. Countries have issued about $900 billion in bonds in foreign currencies and governed by a foreign country’s laws. About 20% of those bonds don’t include collective-action clauses, according to the International Monetary Fund.
Hedge funds and legal specialists are now watching Venezuela, where President Nicolás Maduro’s administration could default on bonds sold by the government or state-owned oil company Petróleos de Venezuela SA, or PdVSA. Some of Venezuela’s bonds allow a minority of bondholders to hold out against a large majority.
“The fact that these guys were able to make a handsome return certainly raises the likelihood that holdout strategies may be employed going forward in places like Venezuela,” said Marco Santamaria, co-head of the emerging-markets multiasset team at AllianceBernstein, with $24 billion under management.
In the Argentina dispute, the holdout hedge funds won an important victory in 2012. A U.S. court issued an injunction that prevented Argentina from paying other bondholders until it settled its debts with the hedge funds.
Elliott Management further antagonized Argentina that same year by persuading Ghana to seize a three-mast ship owned by the Argentine navy with 200 people on board while it was docked in the country. The Argentines didn’t get their ship back for two months, until an international court ordered Ghana to release it.
Two years ago, the hedge fund sued unsuccessfully in California to prevent Elon Musk’s SpaceX from launching a pair of satellites for the country.
Argentina’s ability to hold off payment ran out, as years of isolation from capital markets drained its reserves and left its economy in shambles. Amid 30% inflation, a large fiscal deficit, stagnant economic growth and declining reserves, Argentines ousted the country’s long-ruling populist government in December and installed Mr. Macri.
The deal came together after U.S. District Judge Thomas Griesa moved two weeks ago to lift an injunction and allow Argentina back into capital markets based on the new government’s willingness to negotiate. That put pressure on creditors to settle or risk losing their leverage.
The new government’s policies have made the country’s markets one of the most popular bets among investors. Argentina’s Merval index has gained 12% this year at a time when most of the world’s stocks are falling. And bonds in which the country hasn’t made payments on in years are trading above face value.
“Argentina is one of the few spots in the world where one can look and smile,” said Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management, which has $1 trillion in invested assets.