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The next act in Argentina’s drama

Argentina has finally reached a deal with the holdouts in its long-running debt default saga.

In 2001, Argentina defaulted on $82bn of government debt and it has been grappling with the fallout ever since. Some creditors rejected debt restructurings in 2005 and 2010, and until recently Argentina refused to negotiate with the "holdouts", dismissing them as "vultures".

But late last year, Argentina's populist government was replaced by a reformist administration under Mauricio Macri, who promised "to normalise Argentina's economy after years of mismanagement by his predecessors", says The Economist. And last week, Argentina finally reached a deal with the holdouts.

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It was shut out of the international bond markets for 15 years following its default. Argentina's new deal paves the way for its return. The government is now seeking to borrow for five, ten and 30 years, and will pay interest of around 8%. This is an important step forward, but there is a long way to go. The main problem is inflation, which according to an estimate from the IMF (nobody trusts the official statistics) is around 25%.

The new government's efforts to clean up the mess left behind by its predecessor are giving inflation a further, temporary fillip. It has reduced subsidies of electricity, water and transport that had helped swell the budget deficit to almost 6% of GDP, and allowed the peso to float and fall, bolstering long-term competitiveness. The previous government's currency controls had kept the currency artificially strong and made exporting unprofitable.

Argentina's return to the capital markets should boost foreign investment, but some companies may be deterred by the inflation problem, while Brazil, the country's biggest trading partner, is suffering its worst recession since the 1930s. So getting high prices under control is crucial, especially since failure to do so will cost the government support in midterm elections next year. That would hamper efforts to make structural reforms to burnish Argentina's appeal to foreign investors, says John Authers in the Financial Times. "The drama is not over."

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