The Bond Swap: Argentina Takes a Step Toward Returning To the International Arena
It seems like an image from a faraway time: In late 2001, Argentina's President Fernando de la Rua climbed into a helicopter on the roof of the Casa Rosada, the presidential residence in Buenos Aires, and relinquished his political office. But only eight years have passed since then -- the worst social and economic crisis in Argentine history, which today is mostly remembered for the corralito (the corralling) that froze bank deposits to stop a run on banks and for the country defaulting on its debt.
Against this backdrop a few years later in 2005, President Néstor Kirchner and Roberto Lavagna, his minister of economy, unveiled a plan for local and foreign creditors holding defaulted bonds. Their proposal: Creditors could swap the amount in arrears – US$81 billion – for new bonds, but at a discount of 65%.
It didn’t take long for loud protests to ensue. Bondholders from Argentina, Italy, Japan, and the U.S., among others, weren't going to give up their investments without a fight. But faced with the Argentine government’s obstinacy, 76% of the bondholders eventually accepted the proposal. The rest were divided between those tied up in lawsuits against the government and those holding out for a better deal.
Four years after the first swap was unveiled, Cristina Fernandez de Kirchner, her husband's successor as president, and Armando Boudou, the current minister of economy, announced a new plan to exchange the remaining US$20 billion of paper still in default and past due interest, for a total of more than US$30 billion.
To get the wheels in motion, the Kirchner administration recently asked Argentina's National Congress to suspend a law prohibiting the country from renegotiating the debt with bondholders. The request has gone through the Chamber of Deputies and now awaits approval in the Senate.
While some of the plan's details have yet to be finalized -- such as the final amount of the discount on the defaulted bonds and the maturities of the new bonds -- Boudou has said he is optimistic the plan will be well received, estimating that at least 60% of the bondholders will go along with his proposal.
Conrado Martínez, finance professor with the MBA program at University of Palermo in Buenos Aires, says the bond swap could actually work. "The goal is to exchange the defaulted bonds for performing bonds that are more liquid,” he says. “The fine details have yet to be hammered out, but apart from that, the results [are looking] favorable.”
Aldo Abram, executive director of CIIMA, a research organization studying capital markets as well as economic, legal and political institutions at Eseade University in Buenos Aires, agrees. “It is very likely that acceptance levels will be higher than 60% or even 70%,” he says. “The bondholders who did not participate in the swap in 2005 have proven that, at this point, Argentina has no desire to comply [fully] with its commitments. In addition, the judicial route has been shown to be absolutely ineffective for recovering unpaid liabilities. So it is better to have paper that has a market value and pays interest and amortization than to have nothing at all.”
Currently, some US$4.5 billion of the US$30 billion of suspended payments are in the hands of shareholders who have lawsuits pending against Argentina. In the U.S. alone, there are at least 163 such lawsuits. Although they have not forced the freezing of other Argentine securities, some holdout groups, as well as various vulture funds hoping to buy cheap debt that they can sell later, recently said they will not agree to the new discounts, which are expected to be lower than what was offered in 2005.
Cristian Alonso, assistant economics researcher at Austral University in Buenos Aires, notes that the situation “is made complicated" by various bondholder associations that have resorted to using the courts and arbitrators at the International Centre for Settlement of Investment Disputes. "It remains to be seen if the courts will decide that they have to take into account that the bondholders who did not accept the 2005 exchange will not accept a new one – most likely under worse conditions – unless they consider that this is surely their last opportunity to recover something,” he says.
The US$30 billion of defaulted bonds is a sizable part of the country’s bloated debt pile of US$150 billion. “Argentina's debt is a heavy burden,” says Martínez, “and it will be even more so if you take into account the fact that the interest payments now due, and which need to be paid every year, are substantially lower than what they would have to pay if they went to the capital markets.”
The situation underscores why Argentina now has a reputation for being one of the worst countries in Latin America in terms of dealing with debt, and the prospects for changing that reputation any time soon are relatively poor. “Argentina's problem is its lack of credibility and irresponsible fiscal management," notes Alonso. Brazil, in contrast, "has a higher level of debt but does a good job of managing its public finances".
Raúl Ochoa, director of the international trade relations Master's program at Universidad Nacional de Tres de Febrero, adds that for most countries in the region, debt levels “have improved substantially". In addition to Brazil, which has more reserves than foreign debt, "Chile is also a net creditor that has created a sovereign fund of US$28 billion to avoid the appreciation of its currency. Peru and Colombia are also in a favorable situation. Excellent growth between 2003 and 2008 enabled neighboring countries to overcome the [current] international [economic] crisis without suffering too much.”
Settling Old Scores
“Refinancing the Paris Club debt and improving relations with the IMF [International Monetary Fund] would provide a great boost to the markets and to Argentina's economy,” explains Abram. Since 2001, the country has racked up some US$7.75 billion of debt with the Paris Club of creditor nations. “To ‘settle’ matters, the only thing needed is to normalize relations with the IMF,” says Abram. "The problem is that it is apparently hard for that institution to monitor the Argentine economy according to Article IV [of the IMF's charter]." That particular article requires regular audits of a country's financial accounts, something Argentina has not permitted since 2006. To date, he says, data that the National Institute of Statistics and Census provides the IMF "are mostly distorted.”
“We have to stop running in circles and [instead,] settle things with the Paris Club,” says Alonso. “And we have to stop this ridiculous behavior of not permitting IMF audits. All countries are audited. It is important that a global institution reviews the state of economies to prevent imbalances and provides a single vision,” he adds.
As for the bond swap, Argentina's government has already mandated Barclays, Citigroup and Deutsche Bank to manage transactions with bondholders. In addition to exchanging the defaulted bonds, they will issue new bonds, in both dollars and pesos, which bondholders will have to accept as cash. In doing so, the Kirchner administration will generate new funds of at least US$1 billion.
Expectations for what the swap might deliver are high. Its main goals are to lower the country's cost of capital abroad, which is currently 12%, and make it easier for its private-sector companies to raise debt internationally. (Argentine companies have not issued debt in foreign markets since 2007.) Many also hope that the swap will help attract more investment into the country and improve its tarnished image abroad. But will it be able to do all that?
“Closing the episode of the defaulted debt is a good step in the sense of [the country no longer being] isolated from the voluntary debt market," says Ochoa. "It is indispensable both for the public sector and private-sector companies.”
If the debt swap meets with a positive reception, “Argentina will be able to place bonds — though not in a massive way, but it would be better than the zero credit that we have today," says Abram. "With respect to interest rates, if the current levels of international liquidity continue, investors could be tempted to invest in high-risk bonds, such as those from Argentina, at rates of about 10%. A successful swap would mean a better flow of capital and lower perceived risk of the country.”
Nevertheless, in addition to its debt, Argentina has many other unresolved issues to tackle. “The 'anti-investment' climate will not improve even after the swaps go ahead if nothing is addressed politically," warns University of Palermo's Martínez.
Ochoa reckons it will be difficult to attract fresh investments, because of the current economic downturn, but also because the country has been "weighed down" by a number of recent events, ranging from restrictions being slapped on various imports to the government's takeover of several private pension funds last year. "All of this makes it very hard for a CEO of an Argentine subsidiary [of an international company] to show that it makes sense to invest in the country,” he notes.
In terms of what Argentina can look forward to, Alonso says, "it is too much of a dream to think that [the new debt swap] will enable the country to obtain financing at single-digit rates." As he notes, "Brazil, with all its strength and the image that it has sold to the world, pays between 6% and 7%. For us to reach that level, the government would have to work hard to rebuild confidence.”