Argentina's bond swap

Eating their words

The government tries to make peace with international capital markets

BACK in 2005 when he oversaw a deal to restructure some $82 billion in bonds on which the country had defaulted four years earlier, the country’s then president, Néstor Kirchner, hung tough. The government offered new bonds worth only about 35% of the old ones. This prompted creditors with around a quarter of the debt to hold out for better terms, even though Mr Kirchner ordered Congress to pass a law forbidding any further payment. The creditors obtained court orders barring Argentina from raising fresh debt in international markets. But the economy was recovering strongly, and the world was awash with liquidity: the government managed to sell bonds worth $8.5 billion in the local market and $7.6 billion to Venezuela, albeit in some cases at high interest rates. It even paid off the IMF, partly to avoid being forced to deal with the holdouts.

That was then. Mr Kirchner’s wife, Cristina Fernández, who succeeded him in 2007, is in difficulties. Recession, from which Argentina is now recovering, pushed the public finances into the red. The Kirchners’ hopes of holding on to power at a presidential election due next year are threatened by their unpopularity. Venezuela’s Hugo Chávez has financial problems of his own. Argentina is feeling the price it has paid for excluding itself from the world financial system.

Ms Fernández first expressed interest in reaching a deal with the bondholders ten months after taking office. But with investors panicking the world over, yields on Argentina’s bonds surged to prohibitive levels (see chart). So the government has tried to tap some unorthodox sources of revenue. First it nationalised private pension funds, allowing itself to draw on their $30 billion in assets. An attempt to raid the Central Bank’s reserves in order to repay $6 billion in debt falling due this year foundered on resistance first from Martín Redrado, who was sacked as the bank’s governor over the issue, and then from Congress, where the opposition now holds a majority.

With markets calmer, Ms Fernández wants to make peace with the bondholders. At her request, Congress lifted the ban on reopening the debt restructuring. This month her officials filed a new offer with regulators in the United States, Italy and Japan. Although the details have not yet been made public, the terms are likely to be similar to those offered in 2005, while also including an extra bond to cover interest due over the past five years, according to Alberto Bernal of Bulltick Capital Markets, an investment bank. As with the previous deal, the new bonds may come with a warrant that will pay extra if the economy grows faster than forecast.

Investors have welcomed the news. The risk premium on Argentina’s bonds has fallen. Analysts reckon that around three-quarters of the holdouts will accept the deal, meaning that 94% of all the defaulted debt from 2001 will have been swapped. Officials will hope that such widespread acceptance would persuade American judges to ignore the pleas of vulture funds still seeking to obtain the full face-value of bonds they bought after the default. And Argentina would then be free to borrow again.

Whether the government and Argentine companies will be able to do so as cheaply as their counterparts in Brazil and Chile depends on Ms Fernández changing other policies. She would need to clean up the government’s dodgy economic statistics, and stop harassing private business. There is no sign of this. So Argentina’s debt is likely to continue to be bracketed with that of Ecuador and Venezuela as the riskiest in Latin America until Ms Fernández’s term ends in 2011.