The Argentine government has awarded Barclays Capital the mandate to reach an agreement with the hold-outs on about $20 billion of defaulted sovereign debt.
The government had received separate proposals from Deutsche Bank, Citi and Barclays Capital about restructuring the debt but on 25 September appointed the UK bank to move forward with its plan for the bondholders that rejected the 76% haircut on the country’s $88 billion of defaulted sovereign debt. The last restructuring of this debt was in 2005.
On 2 September, Cristina Fernández de Kirchner, the Argentine president, also announced that the government would use central bank reserves to repay the $6.7 billion of debt in full.
The terms of the deal with the hold-outs is not yet clear but the bondholders are making it clear that the offer must be more generous than the 2005 restructuring. It is understood that the government will offer them new paper on more generous terms over an extended tenor, so that it does not have to bite into central bank reserves yet again.
Second thoughts about Chávez
The government has decided to move on the Paris Club and the hold-outs following Venezuelan president Hugo Chávez’s decision to churn a costly $1 billion Argentine bond soon after acquiring it in August, which precipitated a steep rise in the cost of Argentine debt. Cristina and her husband, former Argentine president Néstor Kirchner, realized they could no longer depend on Chávez and decided to move the country closer to the international community.
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"The Paris Club announcement was rushed and carried out
in a messy way. That did
not reassure international investors."
Miguel Kiguel, director of Econviews |
However, experts warn that even if the country comes to an agreement with the Paris Club and the hold-outs, it is unlikely that it will be able to tap the international financial markets. Commentators say that the government must stop manipulating the inflation data and under present international financial conditions it will be very difficult for the country to access the markets.
The government agreed to pay back the entire Paris Club debt in one instalment, in order to avoid new oversight from the IMF. The Paris Club had insisted that Argentina would require an IMF programme if it wanted to reschedule the debt.
Although markets reacted favourably to the decision, they fell again when it was felt that the government had handled the move clumsily. The government said it would pay the Paris Club $6.7 billion in debt, only to be informed by the organization that the sum due was $7.9 billion.
Mario Blejer, former president of the Banco Central de la República Argentina, says: "Restoring the credibility of Indec, the statistics agency, is an absolute priority. It is vital to restore foreign investors’ confidence in the country."
Miguel Kiguel, director of economic consultancy Econviews, says: "The Paris Club announcement was rushed and carried out in a messy way. That did not reassure international investors."
Commentators say the government made a mistake by selling a bond, with an interest rate of 14% to 15%, to Chávez, as it made the country appear desperate. Argentina will now have to tap into its $47 billion of central bank reserves to pay back the Paris Club debt.
During the past two months, the spread of the country’s sovereign debt over US treasuries has increased markedly from 599 basis points on July 18 to 806bp on September 19, according to the JPMorgan EMBI+ Argentina index. The country has been one of the most battered emerging markets during the past few months because, as central bank president Martín Redrado says, the country is "condemned by its history" and many analysts still regard it as a high risk.
Argentina must find $11.8 billion next year for debt servicing and a further $10.5 billion in 2010.
Even if the government makes Indec transparent and settles with the hold-outs on the defaulted sovereign debt, those moves might not be sufficient to attract foreign investors under present market conditions.
Most local analysts believe it is unlikely that the country will default again but the government must keep its fingers crossed that tax revenues are high enough next year to fill any funding gaps.