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Argentina Fighting Its Way Back Economically

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Beset by political and economic woes, Argentina nonetheless appears determined to resolve its financial issues. How successfully it can tackle that task remains to be seen, since numerous problems in its recent history still loom large in the minds of investors.

Not only did Argentina default on its debt in 2001, in 2012 the country nationalized oil company YPF, which had belonged to Spain’s Repsol and it was ordered by a U.S. judge to pay a group of hedge funds that had refused to accept swaps when the country restructured its debt in 2005 and 2010. The country refused to pay, calling the hedge funds “vulture funds” and went back to court. Other government actions that year were equally intrusive, including import restrictions and currency controls. In 2013 Argentina saw its central bank’s foreign reserves fall by $12 billion, despite policies intended to prevent it.

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But late in that year the government settled some long-term arbitration disputes as it sought to put its financial crisis behind it, and in 2014 it devalued the peso, tightened monetary policy and resumed conversations with the International Monetary Fund on how to improve reporting of its economic data. It even managed to arrive at a compensation agreement with Repsol over YPF and come up with a plan to make back payments to the Paris Club for nearly $10 billion it received before its default.

Of course the year wasn’t without its steps backward. In July, Argentina, still embroiled in that court battle with the hedge fund holdouts, defaulted on its restructured debt. In October Juan Carlos Fábrega, governor of its central bank, resigned after less than a year on the job after butting heads with Axel Kicillof, the economy minister and amid accusations by Argentina’s president of leaking inside information to Argentina’s banks. He was succeeded by Alejandro Vanoli, but the change in leadership didn’t change the problems the bank faced.

Most recently Argentina has been working on reentry into capital markets. In February it hoped to pave the way for a $2 billion sale of Bonar 2024 bonds to non-U.S. investors, but a U.S. judge’s actions put the sale on hold. Last year, U.S. courts halted coupon payments on almost $30 billion in Argentina’s restructured debt after the country declined to make investors from the 2001 default whole.

While the new issue is viewed as farther outside the reach of U.S. courts than its restructured issues in 2005 and 2010 had been, a judge nonetheless intervened, ordering the banks managing the sale to produce documents and witnesses for deposition. As a precaution, the banks then temporarily postponed the sale—but investors don’t seem terribly distressed by the action. Then, too, they aren’t U.S. investors, like the hedge funds still battling it out in the courts.

In early March, Argentina said that a group of other investors, in addition to those hedge funds, have filed between $7 billion to $8 billion in claims that they hope will be decided along with those of the hedge funds. The judge in the case has said he will decide on the additional claims along with the original investors’ claims, but while Argentina has said it wants to settle all the claims at once from all creditors who refused to accept swaps, it’s liable to be a tough slog; Killicof has already referred to the filers of the additional $7billion to $8 billion in claims as “also vultures.” That doesn’t portend a smooth resolution.

Argentina could, however, face bigger problems than the legality of a bond sale and protracted legal squabbles over debt restructuring. The death of the country’s prosecutor, Alberto Nisman, who had leveled charges of conspiracy against President Cristina Fernández de Kirchner, has cast a large shadow over her administration. Her term as president expires in nine months, and she cannot run for a third term, but the country’s weak economy, coupled with the scandal, could send voters looking elsewhere for a new president. And that could mean all bets are off in a country that already has it pretty tough.

Inflation that courted 40% last year and high unemployment are hallmarks of the present Argentine economy. In addition, the price of its chief export, soy, hit its lowest level in four years—dropping 35% in only three months—and that meant it was unable to raise dollars to boost currency flows into the country. In fact, farmers began to stockpile soy on fears that the peso would see yet another devaluation.

That’s just the agricultural sector, and it’s not the only problem. Beset by high export taxes and limits on wheat exports, the sector has seen its standing as the fourth largest producer of wheat in the world in 2006, according to the U.S. Department of Agriculture, dwindle to tenth largest by 2013.

Oh, and while the nationalization of YPF was supposed to help the country cut a $7 billion energy deficit, earnings from production at its Vaca Muerta (Dead Cow) shale oil and gas field disappointed the market at the end of February. Still, the potential production of the field has plenty of room to grow.

But Argentina isn’t the most comfortable place for business these days—or for its own people. In fact, Bloomberg named it the second of the five most painful economies in which to live and work, according to its “misery index” for 2015—where it’s doing even worse than Ukraine, beset by military conflict and the specter of Russian domination.