ECONOMY-ARGENTINA: Huge Debt Swap Set to Open

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Jan 12 2005 (IPS) - "Take part in this one-time offer" invites a new ad published in Argentina.

But although it might sound like publicity for a cruise or a contest with enticing prizes, it is actually the official launch of the restructuring of 81.8 billion dollars in debt that Argentina defaulted on in December 2001.

The exchange of defaulted bonds for new ones, the biggest ever in the world, will slash the value of the debt by around 65 or 70 percent, while rescheduling the payments.

But despite the huge loss that the debt swap will entail for the bondholders, analysts believe that more than 70 percent of them will accept the new arrangement, which the government of President Néstor Kirchner says is a final offer.

Nevertheless, this South American country’s enormous foreign debt will remain a heavy burden for taxpayers over the next half century, because even in the best of cases (if the swap were to be accepted by all of the bondholders – a highly unlikely scenario) it would only be reduced from 181 billion to 120.4 billion dollars.

Those investors who refuse to take part in the swap will be left with worthless bonds, according to the new arrangement.

However, the president of the Argentine Association of Savers, Carlos Baez, told IPS that small creditors holding defaulted bonds will reject the proposal, and are discussing the possibility of suing the state.

Unlike financial analysts, who predict that a high proportion of investors will accept the exchange, Baez, who represents some 3,000 local bondholders, believes that only 50 percent of creditors will agree, and that the "failure" of the proposal will "demonstrate the need for a new, better debt swap."

More than 90 percent of the small savers grouped in the Association say they will not take part in the swap, which opens on Jan. 14 and ends on Feb. 25, and have promised to keep pressing for better terms.

"We are middle-class savers who believed investing in bonds was safe," said Baez, describing the small bondholders in the Association, who invested their money in the 1990s, when Argentina’s foreign debt ballooned.

After three years of recession and tight spending, the financial system collapsed in December 2001, and Argentina defaulted on its debt to local and foreign private creditors in the midst of a profound economic and political crisis.

Now, after years of negotiating, the Economy Ministry is offering three different kinds of securities – par bonds, quasi-par bonds and discount bonds – to the holders of a wide range of defaulted bonds issued in the 1990s, which are denominated in 14 different currencies.

The new bonds will be denominated in four currencies: U.S. dollars, euros, yen and Argentine pesos.

The quasi-par bond was designed with the private pension fund administrators (known as AFJPs) in mind. The AFJPs, combined with local private creditors, hold 38 percent of the defaulted debt. The rest is in the hands of bondholders in Italy, Switzerland, the United States, Germany, Japan and a few other countries.

One incentive to get creditors to accept the swap will be a cash payment on Apr. 1, corresponding to the interest accumulated since Dec. 31, 2003, for those who opt for par and discount bonds.

There will also be extra coupons for those who accept all three of the new securities, tied to the growth of the Argentine economy. The coupon will be paid as of 2006, as long as gross domestic product has grown at least three percent a year.

After suffering its worst depression in history, the Argentine economy began to recover in late 2002, and is currently growing at about eight percent a year.

However, future growth levels are uncertain, especially because the government will resume debt servicing payments once again this year.

Economy Minister Roberto Lavagna said the restructuring would bring some relief, although it would not provide a definitive solution to the country’s heavy debt burden. He described the government’s offer as "realistic", saying it was in line with the country’s current ability to honour its debt.

Of Argentina’s total foreign debt, 81.8 billion dollars worth will be covered by the forthcoming restructuring, while regular payments are already being made to private creditors and multilateral lenders on another 78.6 billion. In addition, 20.7 billion dollars in unpaid interest has accumulated since the default.

Economist Claudio Lozano with the Central de Trabajadores Argentinos trade union federation told IPS that the problem "will not be fixed by the restructuring."

He also complained that the government has put a priority on meeting payments to the multilateral lending institutions, "which share the responsibility for the Argentine crisis", rather than on protecting small creditors.

Lozano said the country will need a strong fiscal surplus for many years in order to service the restructured debt, and added that there is no guarantee that exports will bring in sufficient foreign exchange to enable the government to meet the payments. He also warned of the social impact of earmarking funds to pay off the debt.

The level of acceptance of the debt swap, and thus its possible failure or success, should start to become clear over the next few weeks. But the longer-term challenge is whether the current strong levels of economic growth can be maintained after resuming debt servicing payments.