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Argentina woes will prove costly for comeback
Financial Times
January 14, 2010

By Jude Webber in Buenos Aires

Further woes were piled on to Argentina's ambitions to reintroduce itself on to global capital markets this week as a New York judge, at the request of two vulture funds, froze assets of the country's central bank held at the US Federal Reserve.

The amounts frozen - at just $1.75m - are small compared to the $20bn of outstanding debt still unpaid since the country's $100bn default in 2001. But the judgment is yet more bad news for the country's president, Cristina Fern ndez, after a week of crisis where Mart n Redrado, the central bank president, refused her demands to quit after failing to hand over $6.5bn of the bank's reserves to a government fund to pay off debt.

Closing the door on what was the largest sovereign default in history has become a top priority for the government in South America's second-biggest economy. Ms Fern ndez says it has become "imperative" after eight years shut out of capital markets. But the latest developments, sparked by her decision to use central bank funds to pay off debt, has suddenly made that goal costlier.

Argentina had been hoping for a high single-digit interest rate - about 9.5 or 9.75 per cent - in its long-awaited return to capital markets.

Yet economists and analysts are sceptical that can still be achieved following developments over the past week. "That isn't going to happen now," says Alberto Ramos, an economist at Goldman Sachs.

Argentina is widely seen as a risky investment bet not just because of its continued default but because of unexpected policy moves, such as Ms Fern ndez's nationalisation of pension funds in 2008, and its alleged manipulation of economic data for the past three years to conceal inflation.

Argentina is a big world producer of food commodities such as soya, vegetable oils, corn and wheat and although exports rose by a third to nearly $16bn in the first 11 months of last year compared with 2008, high spending by the centre-left government has left it with a potential gap of some $7bn in meeting its debt obligations of about $13bn this year.

Unable to tap markets and apparently unwilling to rein in spending, the government has had to resort to costlier options - such as selling a bond to ally Venezuela in 2008 at an interest rate of nearly 15 per cent.

The government had been hoping to launch an offer to the holders of the remaining $20bn in debt as soon as it gets approval from regulators, expected later this month, as a key step in its return to capital markets. Guaranteeing debt payments by using about a third of the central bank's "excess" reserves - that is, over and above the monetary base - will help Argentina return to markets at "reasonable rates, not 15 or 16 per cent like now", Ms Fern ndez says.

The problems that blew up last week - sparked, ironically, by Argentina's need for financing - were triggered by Mr Redrado refusing the president's demand for him to quit after failing to hand over $6.5bn of the bank's reserves to a government fund to pay off debt.

Ms Fern ndez then fired him, only to find both her order to oust him and a presidential decree authorising the use of reserves to pay off debt overturned by injunctions that has left the government in limbo and put Mr Redrado back in his job - at least for now. The government has vowed not to back down and legal wrangling could go right to the Supreme Court.

"We don't expect the timetable of the offer to be altered," says one market source familiar with the situation.

However, analyst Daniel Kerner at consultancy Eurasia says: "The aggravation of the crisis implies that the chances of the government delaying the restructuring are growing."

The new offer to the holders of defaulted bonds, dubbed "holdouts" because they spurned a debt restructuring in 2005 and have been holding out for a better deal ever since, involves institutional investors from vulture funds to US pension funds and investors spanning Italy, Japan and Germany. Institutional investors will be asked to sign up for a new $1bn bond.

The government has been tight-lipped on details of the plan, but media leaks have suggested a deal generous to holdouts. Although it will contain a similar "haircut" to the 2005 offer, in which bondholders were paid some 30 cents on the dollar, "they are getting a better deal in present value terms", says Mr Kerner. That meant a deal worth about 50 cents and suggestions that it could also include the payment of interest on gross domestic product warrants made it look especially attractive.

In fact, Ms Fern ndez's husband N stor Kirchner, who was president before her and led the original 2005 bond restructuring, had been thought to oppose such a clause as too magnanimous.

"Now, because of market sentiment, they can't be too cute and make an offer that is not sufficiently generous," Mr Ramos says.

But economist Miguel Kiguel notes that Argentine bond prices have fallen by an average of 10 per cent as a result of the central bank crisis. "With this political noise and bond prices heading south, it's very difficult to imagine doing a debt swap with large participation from the holdouts, and still less to get fresh money in the markets," he says.

The government says it is confident of a 60 per cent take-up, but if investor jitters slash that, Argentina will probably just have to keep the offer open for months, the market source says.

Some investors are clearly not going to do a deal at any price. Enrique Nolting, an independent investor now retired who lost $2.5m in the default, says the new offer looks like being as much a slap in the face as the 2005 one. "I've fought and I'll continue to fight," he vows.

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