Argentina debt swap draws closer

21/03/2010 | Thierry Ogier

Momentum was building this weekend towards Argentina reopening its exchange with holders of up to $15 billion worth of defaulted sovereign bonds

Momentum was building this weekend towards Argentina reopening its exchange with holders of up to $15 billion worth of defaulted sovereign bonds.

Financiers in Cancun said a deal is closer than at any time in the last five years.

“The deal is ready to get done,” Miguel Kiguel of Econviews consultancy, and a former Argentine finance secretary, said. Kiguel reckoned that an agreement may be ready to go after Easter with “a good level of approval”.

Market sources believe Argentina is close to winning acceptance for a deal among bond holdouts (investors who rejected a previous deal).

Edwin Gutierrez, portfolio manager at Aberdeen Asset Management, predicted a percentage acceptance level “in the low 90s”. The value of the offer, yet undisclosed, would “have to be in the high 40s [% of the nominal value of the bonds] to clear”, Gutierrez told Emerging Markets. “There has to be some upside. Otherwise it’s a non starter.”

Argentina’s economy minister Amado Boudou and finance secretary Hernan Lorenzino are in Cancun for further talks with investors on the fringe of the IDB governors’ assembly.

They arrived after Argentine authorities had on Thursday amended an earlier filing at New York’s Security Exchange Commission, to allow the transaction to proceed. Both government officials have declared their intention to proceed with the deal at the beginning of April.

Even those who were originally skeptical have warmed to the idea of a deal during the past week. Observers in Argentina say the real motive lies in a slight improvement in the domestic political climate, following weeks of open conflict that created a sense of institutional weakness and threatened to spark another serious crisis.

The controversy flared up after the decision to transfer $6.5 billion from central bank reserves to the treasury, which prompted fears that the government may be running out of cash or preparing to increase public spending ahead of next year’s elections.

“There is a sense among politicians that the government will not default, and in some situations, Congress will eventually authorize the use of reserves,” Kiguel said. “There is a big political struggle to determine who makes the decision in Argentina. But no one is actually ready to come out officially [publicly] to block such a transaction.”

Gutierrez added that resistance among bond holders has been diminishing as “there has been a significant transfer of bond holdouts from retail investors to institutional investors. If the value of the offer is good, most would prefer to get the money and go out of illiquid bonds.”

Kenneth Levine, a Wall Street lawyer with Carter Ledyard & Milburn LLP, said: “Argentina was forced by the system to honour its obligation.”

A deal would only be a step towards the return to global financial markets, as Argentina has yet to normalize relations with the Paris Club of creditors and the IMF, which are still fragile due to the unorthodox economic policy pursued by president Cristina Fernandez de Kirchner.

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