Second time lucky for Argentina?
As investors wait to hear Argentina's latest debt proposal,
Finance Secretary Guillermo Nielsen tells Emerging Markets
why he is confident of success.
As this year's annual meetings open, the international financial community is experiencing that deja vu feeling all over again: are the Argentines going to take centre stage with yet another out-of-tune offer for restructuring the country's $100 billion in defaulted debt, as they did last year in Dubai? Or are they finally ready to face the music and present a proposal that can convince enough bondholders to exchange the paper they now hold for new bonds, to smooth the way to a new agreement with the IMF, and an eventual end to the crisis that roiled the nation from the end of 2001 through mid-2002?
While the fact remains that ?it won't be over until the fat lady sings?, and uncertainty regarding the acceptance level and its impact on the deferred discussions with the IMF are likely to drag on into early next year, analysts and experts are still trying to decipher the strategy being deployed by Economy Minister Roberto Lavagna and Finance Secretary Guillermo Nielsen.
If a rule of combat is to keep your adversaries off balance, the two officials have succeeded brilliantly. As a result, scenarios and opinions offer a cacophony of possibilities that range from a precedent-setting successful restructuring to an equally path-breaking failure.
During the first week of September, for example, following a brief and coolly correct visit to Buenos Aires by the Fund's new chief, Rodrigo Rato, Lavagna gave reporters the impression that the final proposal, due to be revealed as soon as the US Securities and Exchange Commission gives the green light, would include incentives designed to increase participation rates. Twenty-four hours later, following a 5% increase in bond pricing, the ministry denied such an option was being considered.
Central issue
The level of participation in the swap has become a central issue, as Rato and US Treasury officials have made it known that 80% is the acceptable rate, while Argentine officials maintain any figure around 60% is their definition of success.
Some economists dismiss this numbers game on the grounds that the Argentine case is, among other things, so complicated as it involves thousands of small retail investors, hundreds of bonds issued in multiple jurisdictions and is the first to take place since the abandonment of international rescues, such as Mexico. Others argue that it is the crux of the agonizing negotiation.
Daniel Marx, former international finance secretary and a veteran of debt restructurings, explains why, from the government's point of view, a low participation rate would not be a sign of failure. ?The markets don't seem to understand that the government is very coherent,? he says, ?and has said all along that, without financing, funds that might have gone to bondholders are going to the IMF and that, since it doesn't want to depend on capital markets for financing, the size of the pie is limited.?
According to this logic, Marx points out the real problem would arise if the swap acceptance level were 80%. Under that hypothesis, the Fund would have to resume disbursements or it would clearly have become, as Lavagna has repeatedly claimed, the preferred creditor. ?There simply isn't enough money for all,? says Marx.
Back of the envelope calculations now assume that, counting local holders ? pension and insurance funds and other domestic institutions ? and large foreign institutional investors, the government can count on a close to 60% bail-in. The real question, as one adviser to a bondholder group put it, is ?How much are they willing to pay to get from there to 80%?? But he doesn't rule out an October or November surprise that will rack up a higher acceptance level than anyone would have predicted just weeks ago. ?Even without a single foreigner, they've got 40%,? he admits.
Protection?
Nielsen dismisses the threat of significant hold-outs leading to legal attempts to seize assets. While he is not at liberty to elaborate, given the SEC rules, he insists that the government is fully protected against such litigation because there are virtually no Argentine assets that are subject to embargo or seizure and that they will be prepared to use exit consents and other means to stymie vulture funds and speculative investors. ?Going to court will only incur costs, and then how do they think they will get paid?? he asks.
The end game, Nielsen claims, is firm. ?We are determined that 2005 will be a very different year,? he tells Emerging Markets. He adds that the roadshow to inform bondholders is set for the end of October, following clearance from regulatory agencies in Italy, Germany, Luxembourg and Japan, although he confirms that the team is not ruling out possible delays, especially in Italy.
The negotiations are now taking place in the context of an economic slowdown that will, like it or not, make 2005 a rather different environment than the one that has prevailed during the last two years of economic growth, which has confounded ? even astounded ? most experts. After growing 8.6% in 2003 and with private forecasts in the 6% to 8% range for 2004, GDP is likely to settle down to around 4% next year, according to most estimates.
Tax gathering
Still, improved tax collection along with the continuation of export taxes is yielding historically high fiscal surpluses. At 4% of GDP, the fiscal surplus is comfortably above the minimum 3% target under the IMF agreement. But, given the Kirchner government's avowed commitment to increasing social expenditure, distributing additional public income to debtors is a political non-starter.
Lavagna is adamant in his defence of maintaining the surplus goal at 3%, arguing that Argentine economic performance over the last three decades demands a cautious approach if policy sustainability and credibility are to be achieved. At an August conference held in Buenos Aires by the Council of the Americas, he presented data showing that GDP fell in 14 of the last 30 years, and that deficits were recorded in 33 of the previous 35 years. ?These statistics say it all about the weakness of our economy, and it is hard to understand why the markets haven't understood the implications,? he said.
Lawyers for deep-pocket vulture funds may laugh all the way to the bank before the Argentine restructuring is finally concluded, but German dentists and Italian pensioners seem destined to sing the blues. Unless, of course, they want to try a different sad song ? say, a tango.