By Marc Jones, Karin Strohecker, Rodrigo Campos and Gabriel Burin
LONDON/NEW YORK/BUENOS AIRES (Reuters) – In a Washington steak house, investors crammed around a table this month to listen to a key adviser to the presidential frontrunner in Argentina, which is battling to avoid another debt default.
Guillermo Nielsen, economic adviser to the Peronist opposition leader Alberto Fernandez, jokingly told the nearly two dozen bankers, debt specialists and fund managers at the dinner that his cut of U.S. beef was delicious.
Argentina’s economy, he warned, was not in such great shape.
Fernandez is the strong favorite to win Sunday’s presidential election in Latin America’s third-largest economy, where a market crash has drained reserves and pushed up the country’s borrowing costs.
Once the poll is over, tough negotiations are expected to begin over $100 billion in sovereign debt that has become painfully expensive for Buenos Aires.
“The underlying tone at the dinner was very negative,” said a fund manager who attended but asked not to be named.
“(Nielsen) said that economically, things looked very dark, that the forex reserves are not going to be sufficient for very long, and net reserves would run out within four to five months,” the fund manager said.
Nielsen did not respond to questions about the meeting in emailed requests from Reuters.
With inflation at more than 50% and the peso currency in free-fall, voters are forecast to oust business-friendly Mauricio Macri, who many blame for rising levels of poverty.
With little known about Fernandez, who was unexpectedly selected by the left-leaning Peronists, investors are focused on how he can square lowering Argentina’s debt burden while also investing to kick-start stalled growth and cutting poverty.
Fernandez has said that if elected he would try to avoid creditor losses through a “Uruguay-style” restructuring, a voluntary debt renegotiation by Argentina’s neighbor in 2003 which is widely regarded as a positive model.
Reuters spoke with more than a dozen global fund managers, investors and distressed debt specialists with interest in Argentina, who voiced fears of steep losses and uncertainty.
“(Fernandez) is talking about more fiscal breathing room, increasing wages, increasing pension spending. It’s just not compatible,” said Edwin Gutierrez, London-based head of emerging market sovereign debt at Aberdeen Standard Investments.
All eyes are on the potential make-up of Fernandez’s financial team. Investors said that while it was still not clearly defined, there were key names being discussed.
Two sources who attended the recent meetings, including a Wall Street investor, identified Martin Redrado, Matias Kulfas and Cecilia Todesca, already key members of Fernandez’s economic team, as possible picks to head the Treasury ministry.
A spokesman for Fernandez did not respond to a request for comment. Redrado and Kulfas did not respond to requests for comments, while Reuters was unable to reach Todesca.
Several bankers said Redrado, a former central bank chief, was Wall Street’s favorite, while Nielsen appeared more likely to take on a role in Argentina’s budding energy sector.
Nielsen’s proximity to Fernandez is a red flag for some creditors given the former economy minister and chief debt negotiator’s tough strategy in the 2001-02 default.
Nielsen developed a reputation among bondholders for giving them short-shrift, on one occasion ending a meeting within 15 minutes even though creditors had flown in especially for it.
“The market is terrified of Nielsen and quite comfortable with Redrado,” said Carlos Abadi, managing director at financial advisory firm DecisionBoundaries.
Gutierrez at Aberdeen said he had heard the same names, but added: “It is like a football team: you know who’s going to be on the roster but you don’t know which positions they’re going to be playing in.”
Abadi and one of the people who attended the meetings added Fernandez would likely keep some of the expertise at the central bank, now led by Guido Sandleris, who studied at the London School of Economics and has a PhD from Columbia University.
“I expect at least two of the three top people will remain at the (central) bank, if not all (of them),” Abadi said.
Several investors said the International Monetary Fund (IMF), which has lent Argentina $43.9 billion from a $57 billion deal struck last year, was pressuring others to take losses.
“Now we are hearing them say there may have to be large principal haircuts,” a senior investor at a large hedge fund said, adding the IMF’s message was: “we are going to play hardball.”
An IMF spokesman said that neither Trevor Alleyne, the Fund’s representative in Argentina, nor any other officer discussed a debt haircut during talks with investors last week.
Publicly, the IMF has said it will evaluate its relationship with Argentina once it has clarity on debt sustainability in light of the next government’s policies.
And it is holding off approving a $5.4 billion tranche of funds under the existing program.
Investors expect the IMF will not resume a normal relationship with Argentina unless there were clear signs the country would not totally abandon financial reforms.
“Cooperation will only take place if the macroeconomic plan guarantees that debt eventually goes back to a sustainable path with high probability in their assessment,” the Wall Street investor said, adding that a major restructuring was likely.
Reuters reported exclusively on Thursday that a group of Argentina’s largest bondholders have begun forming a “creditor committee” to avoid being bounced into any painful debt writedowns and are willing to have a “constructive dialogue” with the new government.
“I think people recognize it is probably time to get organized and there seems to be an acceptance to work together,” said the person at the venture capital fund, adding it was important to make sure “nothing can get forced on us”.
Alberto Bernal, Miami-based chief emerging markets and global strategist at XP Investments said a tougher stance at the IMF was spurring bondholders to organize.
“There’s very strong interest among bondholders to get together and have a conversation because you need to get organized, because the IMF seems to be becoming very hawkish.”
However, some investors think Fernandez and his team will not want a repeat of the debt restructuring battles of before.
Robert Koenigsberger, Managing Partner and Chief Investment Officer of specialist investment fund Gramercy, who was instrumental in talks between creditors and Argentina in 2009, said Fernandez appeared more moderate than previous Peronists.
“I don’t think anyone in Alberto Fernandez’s camp thinks that having a long drawn out battle with creditors is going to be a successful strategy.”
He said Argentina had a liquidity rather than a more serious solvency problem, and that the country’s historically boom-and-bust economy would likely pick up once more.
“The market has this kind of feast or famine tango with Argentina that has been going on for many years,” he said. “We seem to be at the famine stage of that cycle and that is typically where it makes most sense to invest.”
(Reporting by Marc Jones and Karin Strohecker in London, Rodrigo Campos in New York and Gabriel Burin in Buenos Aires; Writing by Adam Jourdan; Editing by Daniel Flynn and Alexander Smith)