- The Washington Times - Monday, March 14, 2005

BUENOS AIRES - The government of Argentina has completed the largest sovereign debt swap in history, three years after economic collapse triggered riots in South America’s second-largest country.

The deal, worth $102 billion including past-due interest, was a complicated undertaking covering 150 bond issues and 600,000 investors. The successful restructuring left investors hurting, but raised public optimism and scored political points for President Nestor Kirchner, a popular center-left president who still faces heavy economic problems.

In late 2001, Argentina stopped servicing $81.8 billion in foreign debt to deal with its collapsing economy. Early this month, the government announced that 76 percent of investors holding $62 billion of debt had agreed to accept new bonds — some of which repaid lenders as little as 25 cents on each dollar owed.

New bonds due in April

As a result, Argentina’s total debt has fallen from $190 billion at the end of 2004 to $125 billion. The deadline for investors to take the final offer was Feb. 25. Officials will issue new bonds in April.

Argentine officials and press reports characterized the restructuring, which was accomplished without help from the International Monetary Fund, as a boon to investment and growth. Thanks in part to strong soybean exports in recent years, Argentina’s commodity-driven economy has grown — last year by 8.8 percent.

But decades of corruption and public malfeasance leave many Argentines with doubts.

“There is a general sense of optimism in the country now and a lot of people are pleased, but personally, I’m skeptical,” said Daniel, 49, an accountant who refused to give his family name. “I have my doubts that Argentina will be able to pay this.”

Economists say the country needs to sustain a surplus of at least 4 percent of gross domestic product (GDP) to service its new debt obligations. This will be a tough task, requiring political tenacity to push through structural reforms.

Balancing act continues

Observers say problems could arise, especially if soybean prices fall and deprive the government of future tax revenues.

The debt swap is seen as giving Mr. Kirchner’s government breathing room to tackle other problems, including negotiations on the $13 billion owed to the International Monetary Fund (IMF). Argentina owes an additional $15 billion to other multilateral institutions and faces a battle with utility companies whose rates have been frozen by the government.

Finance Minister Roberto Lavagna, who met with IMF Managing Director Rodrigo de Rato in Washington this month, later told reporters that he plans to take an even harder stance with IMF officials, now that the debt swap has been accomplished.

For his part, Mr. Kirchner recently has called for “self-criticism” by the IMF, which he blames for Argentina’s economic crisis.

Small investors shielded

U.S. investors hurt by Argentina’s default were mostly institutional players. They cried foul to American officials, but were likely to have diversified portfolios that absorbed much of the impact, analysts said.

“The one positive side for the United States is the fact that, unlike what happened with the Europeans, it was not retail investors — the Belgium farmer or German dentist for example — who got hurt directly,” said Fred Thomsen, a political and economic analyst based in Buenos Aires.

“There is a big difference in a U.S. hedge fund complaining about things not being fair and a retail investor in Europe doing the same,” said Adam Lerrick, a professor at Carnegie Mellon University in Pittsburgh and former head of international product development at the investment firm Salomon Brothers.

Mr. Lerrick played a key and controversial role in the negotiations as head of the Argentine Bond Restructuring Agency (ABRA), a group that corralled the negotiating power of about 30,000 European retail investors holding $1.2 billion in bonds.

Holdouts frozen out

In a telephone interview from the United States, Mr. Lerrick said ABRA’s board of directors accepted the Kirchner government’s offer of “a haircut” at the last minute, because a high rate of acceptance would prompt markets and official organizations “to consider the matter solved,” leaving Argentina no incentive to extend additional offers to holdouts.

Some holdouts, who collectively hold about $20 billion worth of defaulted bonds, say they will continue fighting.

Nicola Stock, co-chairman of the New York-based Global Committee of Argentina Bondholders (GCAB), an umbrella group of creditors of which ABRA was a part, said GCAB is offering legal help to members who held out, according to a report on the Dow Jones wire service.

Hans Humes, another GCAB co-chairman, told The Washington Times that he was not giving news interviews “now that this is all done.” But sources close to the deal said Mr. Humes wanted to take the matter to the World Bank’s International Center for Settlement of Investment Disputes.

World Bank role sought

Analysts said such a move would be risky, considering that the settlement venue typically is used for disputes over foreign direct investment. Further complicating this approach is the fact that Argentine courts would have to enforce any judgments, they added.

“It’s a long shot at best,” said Nouriel Roubini, associate professor at New York University’s Stern School of Business and former senior economist at the White House Council of Economic Advisers 1998 to 1999.

Mr. Roubini said in a telephone interview that he supports the IMF’s playing a key role in debt restructuring and has been highly critical of Italian banks for dumping risky Argentine bonds on unsophisticated investors in the first place.

Mr. Roubini has publicly criticized Mr. Lerrick for basing his fees not on how much he helped sweeten Argentina’s overall offer, but on the degree that his team closed payment gaps between his retail investors and big institutional firms.

“These creditors got the deal that everyone else did, and ABRA’s services were worth literally zero,” Mr. Roubini wrote on his blog recently.

Mr. Lerrick, who sees the restructuring as proof that the IMF is not needed to solve debt crises, said major institutional investors were already pushing for the best absolute deal possible.

He said his fee was fair because his bondholders paid him to get the best possible treatment vis-a-vis powerful institutional investors.

Had his group based fees on the rise in absolute value, “the fee would have been twice as high,” he maintains.

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