Argentina is finally hoping to put behind it its massive sovereign debt default of 2001, writes TOM  HENNIGANin São Paolo

ARGENTINA HOPES to finally draw a line under the biggest sovereign debt default in history by reaching a settlement with the remaining holders of bonds on which it defaulted in 2001.

An agreement would open the way for South America’s second biggest economy to re-enter international capital markets after an absence of eight years following its default on almost $100 billion of government debt at the height of an economic crisis.

Finance minister Amado Boudou says he expects to unveil a debt-swap offer this month for about $20 billion in defaulted debt that remains in the hands of holdout investors who refused to accept a 2005 restructuring offer.

Last month the country’s congress voted to suspend a law forbidding the government from reopening the 2005 offer to creditors.

Participants in that deal were forced to accept a swingeing 66 per cent write-down in the value of their bonds in what the government said at the time was a final offer. Boudou says the value of the new offer will be similar, but less attractive than the 2005 deal.

Argentina is eager to settle the dispute so it can tap capital markets to meet its 2010 financing requirements.

A commodities-driven export boom followed the 2001 crash, and for much of the decade the government ran large primary surpluses. However, these have since evaporated as the fiscal position has been squeezed by the global crisis hitting export revenues at a time of increasingly loose expenditure by the unpopular government of President Cristina Fernandez de Kirchner, which has sought to shore up declining support with a series of populist spending measures.

With central banks in the developed world pumping money into the global financial system, the appetite for riskier assets in emerging markets has increased and the government in Buenos Aires believes there will be demand for new Argentine bonds, despite the country’s long history of defaults stretching back over a century.

“It is a good time to go back to markets. There is liquidity and appetite for risky assets and it would be silly not to profit from it,” says Noelia Lucini, an analyst at Capital Markets Argentina in Buenos Aires.

“The government is looking for funds, and the normal thing to do would be to normalise relations with the rest of the world and try to place some debt in international markets.”

However, the new offer could face a stiff challenge from US “vulture funds” whose legal actions in the US have prevented Argentina from issuing new debt since any proceeds risk being seized to pay back holdouts.

Much of the debt in default was originally sold to unwitting retail investors in Europe as well as financial institutions worldwide. But a significant chunk of the outstanding $20 billion is now in the hands of funds specialising in distressed debt. These bought Argentine bonds at massive discounts at the height of the crisis. Since then they have mounted an intense legal and lobbying effort in the US to try and force Argentina to pay out at face value.

Yet four years after the first offer, even most of the vulture funds might now be ready to settle. Many bought defaulted bonds at 15 cents in the dollar, and will make a profit no matter what Argentina offers.

Also the Paris Club of wealthy creditor nations, which has refused to negotiate Argentina’s outstanding $6.7 billion debt with the club until it returned with a new offer to holdouts, might also be ready to call time on Argentina’s pariah financial status.

“I suspect what will happen after this, even if there are holdouts, is that the international community is going to say ‘Mrs Kirchner made one offer, she made another offer, and this is basically it,’ and Argentina will re-enter world financial markets,” says Christopher Ecclestone, Argentina strategist at research firm Hallgarten. “I do not think there will be a problem after she has made a valiant attempt to get this issue resolved even if there is not 100 per cent acceptance.”

A settlement could also pave the way for Argentina to allow the International Monetary Fund to restart annual reviews of its economy, suspended since 2006. Such reviews would facilitate a return to capital markets.