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Coming next: Paris Club, INDEC and a new bond
El Cronista
June 23, 2010

Argentina closes another chapter this week in the soap opera of the default on the debt that started nine years ago. But while the government managed an adhesion above the floor of 60% that it imposed on itself, the normalization of international financial relations requires additional steps that sooner or later must be taken.

Among them four are highlighted: the judicial battle over pending lawsuits, the normalization of the INDEC, the normalization of the debt with the Paris Club and the emission of a bond on the international markets.

Pending lawsuits: The acceptance reached in the swap, larger than initially predicted, always adds up. Every bondholder that enters the operation is a one less plaintiff against the country. But there is a hard and critical core of around US$3 billion, made up mostly by vulture funds that will continue the hunt for Argentina's assets to embargo.

This is why the Economy Ministry is studying different legal ways to pressure them to let go of this strategy. The main pass is to try to get the U.S. courts to back a mechanism similar to the Bankruptcy Law for private entities, which obliges use of an Extrajudicial Preventive Agreement (EPA) and its confirmation. Thus, those who did not enter the swap would have to accept the decision of the majority. In this context it's key that the government get from the operation an adhesion greater than 66%, as this is the percentage that is normally used to consider majorities. In any case, the outcome of this judicial strategy is uncertain, since there are no precedents at the international level.

Paris Club: Undoubtedly it is another step that is coming. There are US$6.5 billion that are still in default. To normalize this debt would allow the activation of a large number of credits for the country that are now frozen. These are loans from public banks in countries like Germany, Japan or France. It's crucial for a country like Argentina, where long-term credit and at low rates (in general it's used to finance large infrastructure projects) is scarce. For example, the last of the thermoelectric plants for the country were constructed with loans from the Bank of Japan and the Eximbank of Germany, entities that today could not lend because of the default with the Paris Club. The government let it be known weeks ago that they are studying a particular mechanism to normalize these obligations. A scheme for which Argentina "would swap" this debt for the chance to hold investments in the country under more advantageous conditions. From the official view, it's seen as a plan based on the theory of "win-win" where both parties benefit.

Normalization of the INDEC: It's not a strictly financial step, but it influences it, and by a lot. Today the interest rate that the markets demand of Argentina to take a bond includes the "INDEC risk". To make the statistics institute more transparent is a necessary condition (while not sufficient) to return to the international circuit.

Emission of a bond: There is no concrete entity which determines when a country has exited a default. But there does exist consensus in the market. The corollary for a complete exit from default would be placing a bond abroad at a reasonable rate and without judicial earthquakes (embargo attempts). It would be the certification of the return to the international financial circuit. Today Argentina must pay between 11.5% and 12.5%. The original intention was to only emit if they managed to get a single-digit rate. But hope rose in the last 20 days, beginning with a clear improvement in the international financial climate and an average recovery of 11% in Argentine public bonds.

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