Sovereign debt

Economics

Free exchange

Sovereign debt

Collateral damage

by D.R. | LONDON

THE old adage that timing is everything was proven yet again this week, in the second round of Argentina’s debt restructuring. When details of the country’s planned swap became public in March, analysts valued it at around 53 cents on the dollar—a hefty profit for investors who had scooped up Argentina’s defaulted bonds in the teens. Most forecasters expected around three-quarters of creditors who rejected the country’s original exchange offer in 2005 to take it this time, which would bring the total acceptance rate to 94%. That, in turn, would give Argentina a very good chance of regaining the access to international capital markets it lost with its 2001 default. Although hedge funds holding non-performing debt would surely try to block any new bond issue in the courts, such a high acceptance rate would probably convince judges that Argentina had made a good-faith effort and lead them to reject the claims.

However, the opening of the deal was delayed for weeks by regulators in Italy, where three-quarters of retail investors who held out of the first exchange are located. That pushed back the start date to May 3rd—by which point Greece’s debt crisis, which many observers have compared to Argentina’s a decade before, had exploded. The resulting flight to quality drove down the prices of all risky assets, particularly other dodgy sovereigns like Argentina, whose interest rate spread above American Treasury bonds has increased by 1.81 percentage points since the final terms of the swap were announced on April 15th. That reduced the consensus valuation of Argentina’s offer—in which investors would receive new paper whose price had fallen sharply—to around 40 cents on the dollar. The government postponed the deal’s closing date to encourage greater participation, but it could not escape the new, harsher financial reality. On Tuesday, Argentina announced it had achieved a 66% acceptance rate—a decent, but disappointing showing.

The key question is whether the performance will be enough for Argentina to borrow internationally. On one hand, the government proudly notes that 92% of the defaulted bonds have now been exchanged, and that the remainder is almost entirely held by unsympathetic “vulture” funds who acquired their positions for pennies. On the other, the hold-outs can argue that Argentina refused to improve its offer in the face of declining market conditions, and that the country can afford to pay more: in April, a judge accepted one creditor’s argument that Argentina’s central bank was the “alter ego” of the government rather than an independent entity, and thus that its reserves should be incorporated onto the country’s balance sheet. The biggest winners from this inconclusive outcome will surely be the lawyers from both sides, who will continue to duke it out in the courts for the foreseeable future.