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Analyzing a swap for debt in default
La Nacion
August 26, 2008

by Carlos Pagni

Cristina Kirchner still hasn't attended a single formal presentation of the proposal. But in lower levels of her government the Economy Ministry, the Finance Secretariat they are analyzing in recent days a proposal to swap the debt that Argentina has pending since December 2001 and didn't enter the swap of 2005. The amount rounds out to some 20 billion dollars.

The plan was put together, in principle, by one of the investment banks that acted as an agent of that operation led by Roberto Lavagna: Barclays PLC.

The agreement scheme suggested by Barclays, which will be given to the President in the next few hours, consists of the following: on the one hand, accept a haircut of 65% of principal and, for the 35% remaining, receive discount bonds in dollars with a maturity date of 2033 emitted under foreign legislation; on the other hand, receive three units linked to GDP growth for each 100 bonds that enter the swap. The creditors would concede that these bonds be delivered and not cash in effect for the interest owes since 2005. In general terms, the agreement would take the form of one of the variants offered by Lavagna three years ago: the "discount bond."

The operation consists of an inverse offer, which is to say, realized by the holder of the bonds and not by the debtor. A mechanism that the technical experts call "reverse inquiry."

In the Argentina political context, that peculiarity anticipates the Kirchners being able to turn to society having not been the ones who folded in reopening the 2005 swap, but that it was the creditors who bowed their heads.

Various financial analysts find that this scene setter could be likely.

One of them explained it this way yesterday: "There are many bondholders of Argentine debt in default that acquired their paper in 2006, in an international context of hyperliquidity. They imagined that those papers could yield more than other holdings if in 4 or 5 years the State reopened the negotiations. The crisis that is hitting the markets made a change in this valuation."

"There are many investment funds that were harmed which need to make some money urgently. And the Argentine bonds in default, different from those already restructured, don't serve as a collateral guarantee to accede to credit. Therefore, it sounds logical that the holders of those papers want to unload them under conditions that they wouldn't have accepted when they bought them."

Another context

Also for the government the circumstances are distinct from the time when N stor Kirchner swore he would not reopen the swap. Now there are suspicions about fiscal capacity. To access money has gone back to being difficult, as seen in the 15% interest rate that Venezuela granted in the last bond placement negotiated with the government of Hugo Ch vez.

However, maybe the overriding motive for which the officials are ready to listen to the offer is that the refusal to make a friendly gesture to the bondholders that fell outside the swap is the principal obstacle that, according to the experts, faces whatever negotiation of debt with other countries, with the Paris Club in front

Although the international affairs section of the U.S. Department of the Treasury has shown itself ready to advocate for an agreement on that obligation in a way that the International Monetary Fund doesn't intervene, the countries whose citizens were the most affected for the cessation of payments by Argentina (Italy, Germany and Japan) have shown themselves, in a discreet but firm manner, very reticent to make concessions.

They only consider excluding the Fund from the deal if Argentina settles it commitments in 2 or 3 lump sum payments, using reserves of the Central Bank.

A more flexible temperament on the part of the Kirchners towards the creditors that didn't enter the swap in 2005 would lower this barrier. For that, as reported in LA NACION on Sunday, the intransigences of the past few months would be replaced by the intention to emit new bonds for those bondholders.

The proposal that various investment funds channeled through Barclay's was introduced into the orbit of the government in March through various people close to N stor Kirchner. The documents navigated under radar until this moment, while at Olivos they have recited the same line: there is no possibility of reopening the swap.

However, at Hacienda the Barclay's proposal a bank with which Carlos Fern ndez and his Finance Secretary, Hern n Lorenzino, interacted with when they reviewed it in Buenos Aires began to take on an unknown attractiveness in recent weeks. Of course, it still awaits the final word political and, perhaps, emotional from the President.