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To: Lucretius who wrote (132492)	11/2/2001 12:38:31 AM
From: SOROS	Read Replies (1) \| Respond to of 436258

Argentina to Default on $95 Billion of Bonds in Debt Exchange By John Lyons and David Plumb and Andrew Barden Buenos Aires, Nov. 2 (Bloomberg) -- Argentina plans to default on at least $95 billion of bonds, more than twice the amount Russia failed to honor in 1998, by swapping the debt for securities that pay lower interest rates. ``This is something new for the financial community in terms of order of magnitude,'' said Mauro Leos, an analyst at Moody's Investors Service. ``It is unique in every respect.'' President Fernando de la Rua said the government will cut $4 billion of interest payments next year through an exchange of bonds. Investors will receive new securities that pay average rates of about 7 percent, compared with 15 percent now, he said. The default is a result of the government's failure to cut spending combined with a decade-long reliance on a fixed exchange rate that made exports less competitive and limited Argentina's ability to respond to lower interest rates during a recession. De la Rua said the announcement shows the government will lower interest costs, though analysts said it will do little to inspire investor confidence and may trigger a run on Argentine banks. One-day interest rates in pesos more than tripled to as high as 190 percent as banks braced for a wave of withdrawals. Bank deposits have fallen 11 percent since the end of June, or by $9.1 billion. ``We could see a big outflow of deposits, and the crisis becomes accelerated and not abated by these measures,'' said Mohamed El Erian, who helps manage $7.5 billion at Pacific Investment Management and holds no Argentine debt. The government is expected to announce more details of the debt exchange later. The extent of investors' potential losses is reflected in the price of the benchmark floating rate bond due 2005, which is trading at about 48.75 cents on the dollar. The bond's yield has tripled since June to 54.5 percent. Brady Bonds The default marks the second time in a little over 10 years that Argentina has been unable to pay its debts. The country defaulted in late 1980s, and in 1992 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 and reduced their dependence on foreign capital in the years that followed. 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. ``The time has come to lower the cost of the debt,'' Economy Minister Domingo Cavallo told business executives and government officials at the state-owned Banco de la Nacion. The default dwarfs that of Russia, which in August 1998 stopped paying on $40 billion of domestic bonds. Argentina, which has $132 billion of public debt, doesn't plan to restructure any multilateral loans, Finance Secretary Daniel Marx said. Pension Cuts De la Rua, in an address to the nation, said the government will cut pension contributions deducted from paychecks in half for one year to boost spending. It also plans to lower the sales tax for credit card purchases to help spark economic growth. The president reiterated that the country will keep the peso pegged one- to-one with the U.S. dollar. Argentina's floating rate bond plunged more than 9 percent to its lowest level in six years after the International Monetary Fund 5.25 to an offer price of 48.75 to yield 54.5 percent. The government said it doesn't expect new foreign loans. Investors' expectations that Argentina would default already are reflected in the prices of many emerging market bonds. Bonds may rise after the announcement once investors assess their worth. ``I would see it as a buying opportunity,'' said Mark Mobius, who manages $7 billion at Franklin Templeton Investments. ``It would be most positive for Brazil, Argentina and Turkey.'' Merrill Argentina selected Merrill Lynch & Co. to advise on a planned exchange of the nation's bonds for new securities. Merrill Lynch International President Jacob Frenkel is in Buenos Aires holding talks with the government. The government also has demanded that local banks and pension funds swap at least $14 billion in provincial and sovereign debt for securities that pay about a third of the interest. S&P this week cut Argentina's credit rating three steps closer to default to ``CC,'' the lowest of any country. The company said any debt exchange that lowers the value of investors' holdings would be tantamount to a default. Moody's also rates Argentina the lowest of any country in the world and has raised concern about the government's debt exchange plans. Government officials said they will offer investors one or more new bonds, which will pay either a fixed 7 percent interest rate or floating rate of 300 basis points over the London interbank offered rate, government officials said.