A V Rajwade: Argentinean bond restructuring

WORLD MONEY

The infamous defaulter has come up with a bond exchange offer. Will it interest investors?

Argentina continues to establish new benchmarks in the history of international finance.

It has probably defaulted on international obligations the maximum number of times; its default on bonds totaling $ 100 billion at the end of 2001 was the largest single default ever; and over the years, it has become such a large borrower of the International Monetary Fund (IMF), accounting for 15 to 18 per cent of IMF's assets, that it has now probably become "too big to fail" for the Washington institution.

To top it all, last month, it launched a bond restructuring offer that has been described as the most complex restructuring ever.

But before looking at the bond restructuring, it would be worthwhile to review that country's long relationship with the IMF. Most independent analysts, as also the IMF's own Independent Evaluation Office (IEO), then headed by Montek Singh Ahluwalia, have strongly criticised IMF's handling of its most important client.

IEO has highlighted the failure of IMF surveillance; support for inadequate policies for far too long, in particular the fixed exchange rate through the Currency Board arrangement; repeated waivers when Argentina failed to comply

IMF's conditions; and so on. Clearly, the IMF has been unusually lenient with Argentina even when, last year, it threatened default on IMF loans despite having adequate reserves.

While the IEO does not attribute political motives to the IMF, outside analysts have long felt that, in so far as dealings with Latin American countries are concerned, IMF is often the handmaiden of the US treasury.

The Currency Board arrangement collapsed towards the end of 2001. The exchange rate was floated and Argentina defaulted on its huge bond obligations "" almost 60 per cent of them being held by foreign investors.

Curiously, a history of previous Argentinean defaults has not deterred hundreds of thousands of Italian and Japanese individual investors from buying Argentinean bonds, now trading at just about 30 cents to a dollar in the secondary market.

One has long been agnostic about the wisdom of individuals directly investing in risky securities, whether foreign bonds or domestic equities.

However, given the large number of individuals involved, the bond default has also become something of a political issue, particularly in Italy.

The situation has not been helped by the Argentinean authorities taking a hard line and refusing to negotiate with bondholders about the restructuring.

The initial package offered barely 25 cents to a dollar. With some marginal improvements, the offer now stands at a little above 30 cents. This represents a larger "hair cut" than in most other sovereign debt restructurings in recent years.

The bond holders are particularly incensed by the fact that Argentina is displaying stinginess even when the economy is booming, and the country's foreign exchange reserves stand at $ 20 billion.

GDP growth has surpassed 8 per cent in each of the past two years, thanks to export growth and high agriculture commodity prices.

The final offer from the Argentinean government, currently open, envisages exchange of existing bonds by the holders for three types of long-term bonds maturing between 2033 and 2045.

The so-called "par" bonds, aimed at retail investors, involve no discount in the principal amount but carry zero interest.

The other two bonds, "quasi-par" and "discount", both involve significant hair cuts and are aimed at the institutional, as distinct from the individual, holder "" a large amount of the Argentinean debt is also held by the so-called "vulture funds", which specialise in making money by investing in distressed assets.

The bonds also carry a sweetener which not many may find appetising "" the coupon goes up if GDP growth in a particular year exceeds the government's forecast.

The bond exchange programme was to have started from November 29, 2004. The date was postponed at the last minute because the bank entrusted with the exchange withdrew, claiming that, given complexity of the exchange, its systems would not be ready by the time of the launch date.

This was, therefore, postponed to mid-January and the offer is due is to expire late this month. It remains to be seen how many investors would take it up.

The authorities have vowed that those who refuse to participate in the programme would get nothing. At the time of writing, only a minority had accepted the offer, despite assurances that those accepting it would be entitled to subsequent improvement, which the authorities rule out anyway.

But most institutional investors prefer to wait till the last date and it is expected that a majority of the bondholders would accept the exchange.

The Argentineans would consider it a success if 50 per cent do so; the IMF, at least in theory, is maintaining that the threshold should be 80 per cent.

The answer would be known in the next few weeks "" and is important for resumption of the currently suspended negotiations between the IMF and its old client.

For, one of the standard requirements of the IMF in such cases is "good faith negotiations" with private creditors. And, the IMF will have a delicate problem if the percentage is between 50 and 80.

On the general question of restructuring of sovereign debt, the IMF's Sovereign Debt Restructuring Mechanism has gone nowhere, mainly because of US opposition.

In the meantime, the Institute of International Finance, Washington, promoted by the international banks, has recently come out with a document titled "Principles for Stable Capital Flows and Fair Debt Restructuring".

This has been drawn up by the lenders' lobby with the association of a group of emerging market countries like Mexico and Brazil.

avrco@vsnl.com