The delay in launching the debt exchange is a clear disappointment for both Argentina and investors. For Argentina, the delay eclipses the government's earlier success in warding off the (arguably more material) risk to the the transaction from class-action lawsuits.
Second, the delay postpones Argentina's pending negotiations with the IMF, which in turn forces the government to continue paying down debt to IFIs on a net basis. For investors, the delay draws attention to the government's incapacity to control risks of operational nature. Fortunately, after a knee-jerking inclination to carry out a segmented transaction, Argentina's decision to delay the process acknowledged the evident benefit of a global launching.
Whether delays can materially affect or not investor participation in the exchange is a separate consideration. Evidently, any sustained delays will expose the government to the asymmetric risk skew represented by the current low level of discount yields. The 20 basispoint rise in 10-year US Treasury yields since early November alongside the 55 basis-point move up in the spread over Treasuries on performing Argentine debt illustrate this risk.
That said, at this stage most investors have adopted a structural strategy bias—cooperative or non-cooperative. At the margin, potential moderate enhancements to the value of the offer constitute a more meaningful determinant for investor participation than an isolated delay in deal execution.
Yet barring rational ---but otherwise unlikely--- enhancements to the proposal, Argentina must strive to leave behind its antagonistic posture and use the roadshow to convince investors' of its answers to two critical questions (both of which have been inadequately addressed hitherto): first, the reason why it cannot be expected to pay investors more than it is currently proposing; and second, the manner in which resources to pay new bonds of participating investors will be effectively isolated from attachment risk represented by potential holdouts.
Joyce Chang
Managing Director
Global Head of Foreign Exchange, Emerging Markets and Commodities Research
JPMorgan
Tel: 212 834 4203
Fax: 212 834 6610
Email: joyce.chang@jpmorgan.com
* I certify that: (1) all of the views expressed in this research accurately reflect my personal views
about any and all of the subject securities or issuers; and (2) no part of my compensation was, is,
or will be directly or indirectly related to the specific recommendations or views expressed herein.