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A new chapter in the odyssey of Argentina's debt
La Nac on
December 09, 2009

by Claudio Loser

For LA NACION



The persistent drama of Argentina's debt and its failure to comply has returned to occupy a preponderant place in international financial news. The financial world, while distracted by the serious crisis hitting Dubai, continues to follow the actions of the administration of Mrs. Cristina Fern ndez de Kirchner and the practical implications of her desire to enter the international markets.

It was seen as positive when the "locked-shut" law was suspended, which prohibited the restructuring of the debt in the hands of bondholders that didn't accept the unilateral offer of the government in 2005. At that time, the offer was accepted by creditors representing 76% of the total of the debt in the hands of the private sector, with an implicit discount of 70%. However, the remaining creditors, known as the holdouts and representatives of more than half of the international creditors, decided not to accept the proposal.

Still when those creditors have not receive any payment since that time, they have been able to win more than 100 lawsuits against Argentina, which recognized their rights. Also, the government has not been able to get loans on the international markets, due to the danger of embargo by foreign courts, like those from the lawsuits of the holdouts. This is still more complicated due to the growing unpaid debt that Argentina has with the Paris Club.

While there are still differences of opinion on the magnitudes, they are very significant. The amounts demanded by private creditors are around US$30 billion, if one includes interest owed since 2001. The debt to the members of the Paris Club arrives at almost US$10 billion, under the same terms. Thus, the debt in dispute constitutes almost a quarter of the public debt if one considers nominal value.

Due to those conditions and the serious concerns around the integrity of contracts, Argentina's debt rating is B-, six steps below investment grade. Only two countries in Latin America have worse ratings: Ecuador and Nicaragua. Also, Argentina has the dubious privilege of being the only member of the prestigious G-20 with past-due debts to the Paris Club.

Until the beginning of this year, the country had been able to cover its needs with internal financing and would unconventional foreign sources, like Venezuela. Since then, the serious accusations of abuse related to this financing have eliminated it as a source of cash, at a time when fiscal needs have rising due to the conflict with the farmers and from the effects of the international crisis. Also, the government used its last margin for movement by expropriating funds administered by the AFJP. Still as the government held some swap operations subsequently, the internal market is tapped out.

In recent months, the government indicated its intention to restore financial relations. However, Argentina continues to be seriously affected by the international crisis and by uncertain internal conditions. Prospects for growth are anemic and the room for maneuvering are very limited, more still after the crisis in Dubai.

However, the government is keeping with its intention to impose a unilateral and arbitrary solution on a large number of creditors. Concretely, in addition to wanting to impose a heavy discount, it would not allow the presence of new investors. With these conditions, the government would have to accept certain realities if it wants an effective solution:

Realities

* While not sitting to negotiate with its private creditors, the country will run the risk of more judicial actions against it, due to growing lateness on the debt.

* These negotiations should be done in good faith and with all the creditors if they want to access international financing and recover external stability. It would be legally unsustainable to have a solution in which the government would select who could and who could not negotiate, prolonging the danger of embargoes on assets around the world.

* Finally, an equitable solution would require adequate terms for the creditors. A non-negotiable offer of 30 cents per unit in nominal value would be practically unacceptable, as the country's economic situation, while problematic, is better.

They are taking into account the previous accords, but the final result has to be given in the context of a real negotiation. On the contrary, it would be impossible to restore Argentina's position in the financial world in which the government still wants to be accepted as a reliable partner by its financial counterparts.

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