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Plan to exit the default generates doubts in the markets
La Nacion
August 27, 2008

Analysts and investment banks believe that fundamental measures must be taken to raise confidence

By Mart n Kanenguiser

Stunned still over the course that has to be taken to avoid a new default in 2009, the government began to look over a proposal for the bondholders that didn't accept the swap in 2005, which would involve the emission of Discount bonds for US$7 billion and that only would enjoy an ample acceptance from private creditors if it includes the coupon linked to growth.

Sources at the Economy Ministry denied to LA NACION that they have been analyzing a proposal from Barclays bank, which contains a haircut of 65%. However, Finance Secretary Hern n Lorenzino expects to today receive Argentine executive Gustavo Ferraro, of Barclays, who participated actively in the consortium of banks that took part in the restructuring of 2005.

Barclays represents a group of investment funds that gave up on collecting through the courts in New York and who promise to enter a second official swap if the new Discount bond is worth close to 40 cents, as opposed to the 27 current cents.

On these rumors, the bank responded with its usual "no comment" from its offices in New York.

Other official sources admit that the Barclays plan had landed in other important official offices; the highest to know of it was Cabinet Chief Sergio Massa, who had let it be known to businessmen and leaders of the PJ that it's necessary to normalize relations with the markets to avoid a default next year.

As reported by LA NACION yesterday, the conversation still have to get the explicit blessing of President Cristina Kirchner, but it's interpreted that the analysis going on inside the government means at least a recognition of the problem.

Massa: terms not complied with

The group that is made up of Massa, Central Bank President Mart n Redrado, and Hern n Lorenzino representing Economy Minister Carlos Fern ndez- put forth the need to partially sincere the inflation data and begin to negotiate with the creditors that have not collected since 2001 (Paris Club, for US$6.5 billion, and the bondholders, for US$30 billion.)

Massa swore to them that there was a window of 45 days in his judgment to normalize official statistics; to walk Trade Secretary Guillermo Moreno onto the plank, and to have a change at the Palacio de Hacienda to have a strong minister. It is now 34 days later and he still hasn't reached any of these goals.

For this lack of progress, analysts and investors consulted by LA NACION doubted yesterday about the viability of the plan to leave the default behind and they gave less merit to the signals to the Paris Club. But they affirmed that, if the economic team wants to start a serious negotiation with the bondholders, they would have to include the bonds attached to GDP, which in 2005 had no value for the analysts, but ended up being the star for investors until the beginning of this year.

As for the 65% haircut put forth by Barclays (which would reproduce the one applied in 2005 by Roberto Lavagna's team), they said that it would end up being too generous before the predisposition of the non-belligerent funds (excluded among them Dart and Elliot). "It would have to be more aggressive because there are investors with very un-liquid paper," said another executive that participated in the last renegotiation.

On that, the chief analyst for the Bulltick fund, Alberto Bernal-Leon, argued from Miami that "the possible gain for the bondholders in default is a lot smaller than what could have been in March, for which the government will have to take pains to pull off a good level of acceptance." Only this way would a new debt swap serve to recover ground in the international voluntary markets, he said.

But Pablo Morra of Goldman Sachs took it a step further: "Before thinking of a bond swap, there have to be more important signs, like having a trustworthy anti-inflationary policy, because on the contrary, the government could return to emitting debt abroad, but at a rate far too high for its chances."

Argentina faces debt maturities for some US$19 billion in 2009 and a high country-risk (680 basis points, according to yesterday's close) reflects the widespread doubts that exists about its capacity to pay.