Argentina debt situation: Argentina Sticks to a Rough Game

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East-West Debt news, update : ARGENTINA

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Argentina Sticks to a Rough Game

As mentioned, Argentina finds itself in a similar position as Iraq. This country would also love to reschedule its defaulted debt this spring, and is also in the region of $100 billion in such debt. Yet the differences are also striking. Where Iraq has ten thousands of creditors, Argentina has over half a million making the Iraqi number only a mere handful. The government of President Kirchner has antagonized and alienated virtually everybody to whom it owes money, where the general attitude towards the Iraqis was one of goodwill and sympathy from the start. And most importantly, Argentina’s bilateral debt is negligible compared with the amount it owes the private sector (in Iraq, it’s the other way around).
“Absolutely Unacceptable”
Nearly three years after Argentina declared a moratorium on its foreign debt, the country last winter finally looked as if it was going to launch a bond exchange in an attempt to cure the default. Still, not every observer was confident that it would achieve much success. One important reason is that most of Argentina’s bondholders seem determined to reject the country’s offer out of hand. When last June the government proposed to write off 75% of the debt, a major group of creditors reacted immediately. The Global Committee of Argentina Bondholders (GCAB), which claims to speak for about 44% of the bondholders, called it “absolutely unacceptable”. Argentina is not negotiating in good faith, said GCAB Co-Chairman Nicola Stock. Thus far, creditors have said they want at least 65% of their original investment back.Still, the government seems confident it can gain a significant participation rate in a swap. This confidence was buoyed in October when the country’s private pension funds agreed to accept the controversial proposal.
Time is a Weapon
The most important player in the Argentine team is Roberto Lavagna, the Economy Minister. Since he took over in April 2002 he has been branded confrontational with little regard for international financial protocol or tradition. He hasn’t only taken a hard stance towards the creditors, but also towards the International Monetary Fund (IMF). His most effective weapon has been time. By spinning the restructuring process out for almost three years, he has worn a lot of investors down. The problems in Argentina have become the world’s biggest sovereign debt crisis. So far, the government’s stubbornness seems to have paid off. The economy is rebounding, there is plenty of cash to finance investment and the government is saving some $700 million a month by not paying its creditors. But there are also major risks. The central bank has given warnings that unless Argentina regains access to international capital markets the cost of renewing domestic debt in 2005 and 2006 will drag down growth. And the country will need fresh money from the IMF to repay it next year. It may not get that without a deal acceptable to, say, 70% of bondholders.
Law Suits
For that reason, Argentina’s aggressive game is seen by many analysts and bondholders as short-sighted. Another criticism of Argentina’s approach is that it has created a problem in the form of lawsuits by angry investors determined to seize Argentine assets. In August, for example, EM Corporation, owned by the Dart family, won an appeals court judgment against Argentina for $740 million for payment of defaulted Argentine bonds. A scary prospect for Kirchner’s government? Not necessarily. It is not clear which assets investors can seize. The government sold off all the state-owned companies in the privatisation process of the 1990s. Assets abroad such as embassy buildings and vehicles are protected. Even an attempt to seize cash in a US bank account belonging to Argentina’s privatised postal company, expropriated by the state last year, failed. One fact reveals investors’ perceptions of their chances of success through the courts: only a handful have taken out lawsuits. Most believe it to be a waste of time.

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Argentina declared a moratorium on its foreign debt, Argentina last winter finally looked as if it was going to launch a bond exchange in an attempt to cure the default.