Locals on board for Argentina debt swap

Louise Egan
January 14, 2005

Buenos Aires: Argentina on Friday launched its historic offer to restructure $102.6 billion in defaulted debt, scoring an early but expected victory as local pension funds holding 17 percent of the bad debt signed up for the exchange.

Yet foreign creditor groups vowed to resist the offer and began their own counter-offensive in a battle to win the support of undecided bondholders.

After three years in default, President Nestor Kirchner is asking private creditors worldwide to sign up for an offer that amounts to the biggest loss to investors of sovereign debt in modern times. The so-called “haircut” could be as high as 70 percent.

Argentina will issue up to $41.8 billion in new bonds in exchange for the $102.6 billion in bad debt held in at least 10 countries. The main obstacle to success is the Global Committee of Argentina Bondholders, or GCAB, which says its represents $38 billion of the debt in default that won’t be swapped.

Argentina’s 12 private pension funds immediately accepted the swap after they agreed months ago to the offer in prior negotiations with the government.

“The new bonds maintain the value of retirement savings,” said the Union of Pension and Retirement Funds in a statement.

Local retail investors and banks were also signing up on Friday, market sources said, but analysts expect other investors to wait and see how much support the offer draws before acting.

The final result will not become clear until close to the Feb. 25 deadline approaches. The government will announce the outcome on March 18.

‘Bullying by Argentina’

Amid intense speculation on how many investors outside Argentina will swallow their losses and sign up for the exchange, GCAB claimed there was evidence more and more were preparing to hold out on bets of better terms in the future.

“Argentina has taken a first step in what we think will be a subsequent negotiation. They’ve given their offer and we’re going to come out and give our offer, what we would do,” GCAB Co-chairman Hans Humes told Reuters.

“We’ll point out the reasons that people should not be taken in by this last round of bullying by Argentina. And we’re not on our own. Everybody seems to get it,” he added.

European bondholders resisting the offer will have one-to-one meetings next week with Finance Secretary Guillermo Nielsen, undersecretary of Finance Sebastian Palla and UBS bankers who manage the debt swap, investors said.

Hours before the debt swap opened, Kirchner told a crowd of supporters in Buenos Aires the “whole world” should know the offer would never be sweetened.

Despite robust economic growth, a strong primary budget surplus and hefty reserves, Kirchner says Argentina is still crippled by its crisis and cannot afford to pay more.

But GCAB believes he is bluffing. The group will hold its own presentations to investors, parallel to the government’s roadshow, to persuade undecided bondholders they can get better settlements in court after the offer closes.

But investors must make a tough choice: either reject the Argentine offer and fight in court without assurances of payment or accept the offer and get at least some payback now.

GCAB supports a class action suit filed by German bondholder Horst Urban against Argentina to fight for better terms on two types of eligible bonds.

An Italian bondholder group launched a separate class-action suit on Jan. 12.

Market reaction to the opening of the swap was subdued.

The price on Argentina’s global bond due to mature in 2008, a benchmark indicator of how much the market expects to get back on the dollar of bad debt under the swap, traded in a tight range above and below 32 cents.

(Additional reporting by Walter Bianchi in Buenos Aires and Sophie Hardach in Milan).

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