The Argentine government will not entertain re-opening last year’s record breaking debt swap to resolve the $20 billion in defaulted bonds, whatever the economic implications, according to analysts. But fund managers are increasingly calling into question the government’s strategy of ignoring the unresolved debt.
That strategy does not make good economic sense for the country, a leading fund manager said. “At this point, with a minimum of decent communications [from the Argentines], a broad majority of the hold-outs would fold and accept an even larger discount. According to my calculations, there are only about $6 billion held by investors who are willing to pony up the money to keep fighting.”
He questions the rationality of being barred from raising money in the cheapest, most liquid market in years in order to clip the wings of the “vultures” to save what amounts to a piddling sum of money.
Although the unresolved bond hold-outs should, in principle, have prevented Argentine authorities from accessing international financing, the opposite appears to be the case.
The sovereign has been able to place successful foreign currency bonds in the domestic jurisdiction, avoiding the threats of embargos posed by deep pocketed “vulture funds” which are still fighting in US and European courts.
Sources in the economy ministry claim that three quarters of this year’s financing needs are already covered, leaving, they say, only a $2 billion gap to be filled during the rest of the year.
Guillermo Mondino, Latin American economist for Lehmann Brothers, points out that, given the current economic picture in Argentina and the appetite for yield, there is simply no source of sufficient pressure to force any movement
on the hold-out front. “From the government’s point of view, there is no gain at this point,” he said.
“No question about it: Argentina’s debt swap was a big win for the country and a big rip-off for the markets,” said a prominent hedge fund director. He predicts that the paper still held by investors who refused to participate in the restructuring will join the bonds of Czarist Russia and the US Confederacy as worthless curiosities.
The February 2005 restructuring discounted over $120 billion in bonds by about 75%, the largest haircut in the modern history of defaults. For 24% of the bondholders this was a trip to the barber they were unwilling to make.
The US Treasury – which has played a dominant hand in debt restructurings around the world – is sitting conspicuously on the sidelines. When asked about the hold-outs, Clay Lowery, Assistant Secretary of the US Treasury for International Affairs, was categorical: the issue does need to be addressed. But, he added quickly: “We are very careful not to intervene and in no way are we trying to be an honest broker.”