Sunday, September 27, 2009

Argentina works toward resolution of 2001 sovereign debt default

WSJ - Argentina Works to Resolve Paris Club Default
WSJ - Argentina, Investors Reach Deal on Debt
Financial Times - Argentina hopes to settle debts
Reuters - Venezuela, Argentina to issue bond in latest pact

Argentina continues to work towards resolving the default on its sovereign debt that dates back to 2001. Since the default, Argentina has had extremely limited access to the international capital markets. Argentina has laid out an aggressive spending program for 2010. If tax revenues do not increase, the country will face a deficit that it is not likely to be able to fund. In recent years, Argentina financed its funding gap through Venezuela’s purchase of Argentinean bonds; however, Venezuela is currently in a cash crunch and it is unclear whether that funding source will be available in 2010.

Argentina has attempted to settle with the bondholders several times since the default occurred. In 2005, it reached a deal with approximately 75% of the bondholders. Currently, Argentina is in negotiations with two different groups, the Paris Club and a group of private investors, who are working with them in an effort to settle debts relating to the 2001 default. The Paris Club, which holds $6.7 billion of debt, is a 19-member creditor group that includes France, Germany, Italy, Japan, and the United States. The group of private investors holds debt with a face value of around $20 billion. If Argentina can reach a settlement with the two groups, the country would likely re-gain access to intenational capital markets.

Argentina met with Paris Club member France during the G20 meetings this week and discussed preliminary steps towards resolving the default. Argentina has already stated that it cannot pay the members at the current time, so any settlement would likely involve cutting the value of the debt and extending payment into the future. The Paris Club members are in a delicate situation, as they are encouraging developing countries to increase their domestic demand. One obstacle to increasing domestic demand for Argentina is its ability to fund deficits through access to international capital markets. This provides Argentina, which has the second largest economy in Latin America, with more bargaining power than it has had in past negotiations. Argentina is hopeful that an agreement can be reached by the end of the year.

Argentina is also in the advanced stages of negotiations with the group of private investors that hold approximately $20 billion dollars in bonds. Argentina is proposing that the group of investors exchange the defaulted bonds for bonds at a 33.7% exchange ratio and GDP warrants. Argentina would not pay out any cash under the deal. The new bonds would come due in 2016 and have a coupon rate of 13.5%. The GDP warrants would have a notional face amount equal to the value of the debt tendered and pay out based on the performance of Argentina’s GDP. Investors that hold $8 billion of the remaining $20 billion of debt have agreed in principle to the exchange. Argentina anticipates that once the offer is finalized, the transaction size will increase to between $11 and $15 billion. Argentina continues to assert that it will distinguish between investors that rejected the 2005 offer in good faith and “vulture funds” that refused to accept the deal in hopes of winning a large court settlement.

Should Argentina distinguish between investors who refused the 2005 offer in “good faith” and “vulture funds” that held out in hopes of winning a lucrative court settlement during future negotiations?

Should the Paris Club have been more willing to negotiate with Argentina and cut the amount of debt due sooner, given the relatively small amount of the debt compared to the combined wealth of the Paris Club?

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