Grinding them down: Argentina’s debt
January 17, 2005

This week Argentina’s government formally issued its take-it-or-leave-it offer to holders of $81 billion of bonds on which it defaulted in December 2001, The Economist writes.

The terms are harsh, the weekly writes. Even so, most bondholders will probably accept them. What is less clear is whether this will be enough to turn Argentina’s powerful recovery from economic collapse into sustained credit-driven growth. At a series of presentations around the world due to start on January 14th, Argentine officials will present creditors with a choice of 16 different bonds in four currencies. In all cases, the present value of the new bonds is barely above 30 cents per dollar originally invested. This write-down is nearly twice as big as the average in recent sovereign-debt restructurings. Many bondholders are furious. They say Argentina, whose economy is growing strongly, could pay more. That is debatable. Even if most bondholders agree to the swap, Argentina’s public debt would still stand at a whopping 80-90 percent or so of GDP. But what can the bondholders do? The government has few assets abroad that its creditors could seize.

If Argentina’s gamble pays off, President Néstor Kirchner will make the popular claim that he has outfaced the IMF and foreign “speculators”. But even a successful deal will leave a sour taste in the capital markets. The government’s calculation is that it—and the economy—can live without foreign financing. Thanks to booming prices for its farm exports, and extraordinary taxes on them, the government racked up a primary fiscal surplus of 4.2 percent of GDP last year. The new bonds’ long maturity and low interest rates should make debt service manageable. Meanwhile, officials say that investment will come from Argentines’ repatriating capital to supply buoyant domestic demand. The trellis underpinning such rosy reckonings is a booming world economy awash with cheap money. If and when those conditions change, Argentina could find itself in trouble again—and with no stock of goodwill.

Latinnews Daily reports that Argentine Economy Minister Roberto Lavagna announced that the government will be satisfied if just 50 percent of bondholders participate in the restructuring of Argentina’s $88 billion defaulted commercial debt. The government initially said that it wanted two-thirds of bondholders to take part in the debt swap. Bondholder associations believe a 75 percent acceptance is necessary, while the IMF has demanded 80 percent participation. The fact that the offer has been approved both by the US Securities and Exchange Commission (SEC) and the Italian market regulator has weakened the chances of mounting a legal challenge, but bondholders hostile to the offer have been hoping that Argentina would be forced to improve the deal if and when it failed to attract the 66 percent support the government was initially hoping for.

Reuters reports that Guillermo Nielsen, Argentina’s finance secretary, said that any attempt to sweeten Argentina’s debt swap offer would trigger instability. “(An attempt) to improve the offer, to put in more money, would bring us back to instability. In two, three years we would be forced to restructure the debt again,” Nielsen said. “We do not want to fall back into default.” Italy, which is home to the biggest number of foreign holders of Argentina’s defaulted debt, has urged Buenos Aires to improve the deal.

The Financial Times meanwhile writes in Friday’s editorial that the IMF should refuse to agree to a new deal unless a clear majority of creditors – the top end of the 60-80 percent range forecast – accept the government’s offer. Some creditors will choose redress through the courts but the majority are expected to cut their losses. The IMF, however, must hold firm. Despite the suspension last August of an existing agreement, the fund retains considerable leverage. Argentina faces a steep increase in debt payments this year and would probably prefer to refinance rather than repay its $15 billion obligations to the Fund.

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