Time to Cry for Argentina?(article debates whether this problem is branching out and may drop a few more shoes-max)
By Matthew Goldstein
Tuesday January 8, 5:32 pm Eastern Time
SmartMoney.com - The Economy biz.yahoo.com
THE ONLY GOOD thing that can be said about the collapse of Argentina's economy is that it's happening in slow motion. The crisis has been playing out for so long that most U.S. banks, mutual funds and other financial institutions have had plenty of time to get out of the way. Unfortunately, as the country's pain spreads from its government through its private sector, U.S. lenders and investors may find themselves crying for Argentina after all.
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At first, it's true, Wall Street barely flinched when Argentina finally defaulted Christmas Eve on its $132 billion in government debt. That's because U.S. financial institutions managed to limit the damage by unloading some of their Argentine government-issued bonds weeks or months ago. Even the stocks of FleetBoston Financial (NYSE:FBF - news) and Citigroup (NYSE:C - news), the two U.S. banks with the biggest presence in Argentina, didn't skip a beat on the news that Argentina was suspending interest payments on its bonds. Nor did Fleet's stock budge much when the bank announced Dec. 19 that it would take a $150 million fourth-quarter charge against earnings to write off some of its Argentine government debt.
But in the past few days, Wall Street has begun to take a less sanguine view. Investors are increasingly troubled by the Argentine government's decision to devalue its currency by 30% and to stop pegging the value of the Argentine peso to the U.S. dollar. The move will make it more difficult for Argentine companies to pay back foreign debts because they'll need to cough up a lot more pesos. And in a move to mollify its citizens, the Argentine government is converting all private dollar-denominated loans under $100,000 into pesos — a move that translates into an automatic loss on investment for the banks issuing those loans since the face value of the loans will be roughly 30% less.
Worse, given all the chaos surrounding South America's second-largest economy, there's a good chance that many companies will simply default on their debts. And defaults aren't good news for the banks that made those loans. ``Private corporations will be severely affected, which is something that was not completely contemplated,'' says Maureo Leos, the lead analyst on Argentine debt at Moody's Investors Services, the credit-rating agency. ''The focus of attention was mainly the public-sector debt. There was no explicit consideration for a total collapse of the [economic] system.``
The devaluation has increased the risk of default on about $60 billion in Argentine private-sector bonds held by foreign investors, Leos figures — and much of that debt is probably held by U.S. institutions. Now Wall Street bank analysts have begun trimming their 2002 earnings estimates for Fleet and Citigroup, and suggesting that additional charges against earnings could come as the banks are forced to write off more bad Argentine debt. In fact, a steady stream of downward earnings-estimate revisions the past two days is likely the main culprit behind Tuesday's nearly 2.56% decline in shares of Fleet and the 3.68% drop in Citigroup's stock.
Still, most banking analysts are telling investors in Fleet or Citigroup not to get too alarmed. They estimate that loans to Argentine corporations account for no more than 3% of each bank's loan portfolio and that any bottom-line damage will be limited. ''There could be more charges. But we think it's manageable,'' says Tanya Azarchs, a Standard & Poor's bank credit-ratings analyst. Similarly, Ron Mandle, a banking analyst with Sanford Bernstein, foresees the peso devaluation having only limited impact on bank earnings.
Unless the Argentine economic mess spreads to neighboring countries in South America, there's a good reason to believe the bank analysts may be right. But banks aren't the only U.S. institutions that are exposed to potential losses as Argentina's private sector gets crunched. For instance, one of the larger issuers of Argentine corporate debt is Cablevision, a big cable television operator with $400 million in bonds scheduled to come due this year, according a report compiled by Banco Rio, a Spanish bank with a major operation in Argentina. Two of the controlling partners in Cablevision (no relation to the U.S.-based cable conglomerate of the same name) are a division of Liberty Media (NYSE:L - news) and Hicks Muse Tate & Furst, a Dallas-based diversified venture-capital firm. Some other big U.S. companies with significant stakes in Argentine corporations, according to the Banco Rio report, include telecommunications giants Nextel Communications (NASDAQ:NXTL - news), BellSouth (NYSE:BLS - news) and electronics manufacturer Motorola (NYSE:MOT - news).
And don't forget about the owners of that $132 billion in Argentine sovereign debt. Just because Wall Street and the rest of the investing world has known for weeks that an Argentine government default was all but inevitable, there are still investors who've suffered real losses. A group of unidentified Argentine government bondholders has hired the Chicago-based law firm Mayer Brown & Platt to try to negotiate a possible payment plan with Argentina's new government. Michael Richman, a Mayer Brown partner and a bankruptcy lawyer, says he recently sent a letter to Argentina's economic minister seeking to jump-start those negotiations, but he hasn't yet received a response. Over the next few weeks, Richman say he'll start releasing names of some of the bondholders who've retained his law firm's services.
Meanwhile, Argentina's 36 million citizens continue to endure a grinding four-year recession, have had access to the bank accounts restricted and have seen the inauguration of their fifth president in less than three weeks. Indeed, things are so bleak that some citizens are said to be contemplating fleeing to other countries to escape the economic misery. As Sergio Ciriani, a member of our SmartMoney.com Investor Panel and a Buenos Aires resident, sums it up: ``One begins to feel ashamed of being Argentine, and that's sad.''
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