Argentina Signals Default on $38 Billion of Debt (Update6)
By John Lyons
10/29 18:25
quote.bloomberg.com
Buenos Aires, Oct. 29 (Bloomberg) -- Argentina signaled it would default on at least $38 billion of bonds held by international investors by hiring Merrill Lynch & Co. to help exchange debt for new securities.
The country's bonds, already rated by Moody's Investors Service the lowest in the world, tumbled. The yield on the floating rate bond due 2005 climbed to a record 42.6 percent.
The government said Merrill Lynch International President Jacob Frenkel, former governor of Israel's central bank, would head a group advising Argentina on issuing new securities to investors. To reduce Argentina's debt burden, the new bonds would have to pay lower interest and have longer maturities than the nation's outstanding bonds, analysts said.
``If you cram a restructuring onto someone, it's essentially a default,'' said Charles Cassel, who helps manage $450 million in emerging market assets at Standard Asset Management and sold most Argentine holdings last year. ``They are saying if you don't help us out now, you will end up getting far less.''
Argentine Economy Minister Domingo Cavallo said the debt exchange would be voluntary and include guarantees from international lenders; he didn't say what the country would do if investors don't accept the terms. Standard & Poor's, which also cut its credit rating for Argentina, has said it would characterize such a transaction as a default if the bonds investors receive have lower value than what they already own.
Widely Held
Argentina's bonds, which represent about a quarter of all international emerging market debt and now yield more than any other, have been widely held, including earlier this year by such investors as J.P. Morgan Investment Management, Putnam Investment Management and the Lutheran Brotherhood. The yield spread of Argentina's bonds over U.S. Treasuries with comparable maturity widened to 20.14 percentage points, according to a J.P. Morgan Chase & Co. index.
``Unless there's something I don't understand, I don't see how this could be voluntary,'' said Abel Viglione, a senior economist at Argentine research company Fiel. ``It sounds compulsory to me, more like a bankruptcy.''
Finance Undersecretary Julio Dreizzen, who has helped Argentina raise financing since President Fernando de la Rua's government took office in December 1999, resigned today, citing personal reasons, the Economy Ministry said.
Unlike in the late 1980s when Argentina stopped making interest payments, the government is sending a message to investors that interest, though reduced, still will be paid. It is lining up financing and announcing the restructuring before the country misses any debt payments.
Legal Contracts
That is significant because some investors are in legal contracts that define a default as a missed payment. Moody's and S&P indicated this month they may take a broader view of default after the government demanded domestic banks and pension funds accept new securities paying 7 percent interest for at least $14 billion of bonds that offer interest of about 25 percent.
Moody's, which cut Argentina's foreign and local currency debt ratings Oct. 12 to ``Caa3,'' said the government may be ``resorting to unorthodox solutions to the country's financial problems.''
On Oct. 16, S&P issued a statement to clarify its rating downgrade on Argentina the week before to say that any exchange that offers investors less favorable terms would be considered ``distressed'' and constitute an effective default. Officials at both rating agencies wouldn't comment today.
IMF Loans
Cavallo said the country will depend on International Monetary Fund loans and support from the seven most industrialized nations to carry out the transaction. It wants to guarantee new bonds with $3 billion earmarked from the IMF as well as other loans. Cavallo probably also will ask the IMF, which had a team in Buenos Aires today, to speed up a $1.2 billion loan payment scheduled for December, analysts said. IMF officials wouldn't comment.
``We are going forward with an operation to lower interest rates, which will be voluntary, without affecting investors or depositors,'' Cavallo said on national television last night. ``The plan is ready and has consensus, but before we can announce details, there are still deals to be worked out with the International Monetary Fund and banks.''
Merrill Lynch's Frenkel didn't return calls for a comment.
Markets
Argentina's floating rate bond due 2005 fell 10.8 to an offer price of 56, pulling down emerging market bonds from Brazil to Ukraine. The benchmark Merval stock index fell 8.7 percent to 219.54, a 10-year low.
The one-month contract for delivery of Argentine pesos fell to 1.0325 pesos per dollar from 1.0237, reflecting increasing investor concern the government may give up a decade- old system that has pegged the peso one-to-one with the dollar.
Argentina has been in this position before. Along with most other Latin American countries, Argentina defaulted on government debt it sold in London in the 1820s and on state and federal government obligations it contracted in the 1920s.
In 1992, the country issued about $25 billion of so-called Brady bonds in exchange for debts accumulated in the late 1970s. Other countries that restructured defaulted debt, such as Mexico, cut spending, reducing their dependence on foreign capital. Mexican floating-rate bonds that mature in 30 years yield about 8.5 percent.
Argentina raised about $89 billion on capital markets in the past 10 years, most through foreign bond sales, to help finance a widening budget deficit.
Wage Cuts
In the past several months, the government has tried to reduce the deficit by cutting state wages and pensions by 13 percent, raising taxes and slowing tax transfers to provincial governments. Still, tax collection fell 14 percent in September and the government has faced increased opposition from workers, the unemployed and provincial leaders to its cost-cutting plans.
The country has a total $132 billion of public debt, including about $95 billion of bonds. The government estimates international investors hold about $38 billion of the bonds; Merrill says the amount is $45 billion worth, while other banks put it as high as $55 billion.
Banks had $66 billion of cross-border exposure to Argentina, including local claims in foreign currencies, as of March 31, according to the Bank for International Settlements. FleetBoston Financial Corp. reported $2.24 billion of Argentine exposure as of June, while J.P. Morgan Chase said it had $1.4 billion after subtracting what it considered collateral, such as hedging contracts. |
