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Argentina's messy debt exchange

Ingeniously structured from a legal point of view, Argentina's debt restructuring begins with what is effectively a domestic bond swap. If you are a bondholder, though, the pricing doesn't look as clever as the structure. And looming on the horizon is the threat of exit consents and the worry that Argentina will not countenance an abandonment of the fixed peso-dollar exchange rate.

Argentina has embarked on the biggest bond default in history, and for all the country's attempts to do so in a transparent and orderly manner, the process is not looking very pretty so far.

A comprehensive Argentine debt restructuring has been a question of when rather than whether for some months. And as far as rating agency Standard&Poor's is concerned, at least, the key date was November 6. That was when the sovereign announced that it was going to swap its outstanding bonds for new loans, issued under Argentine law and collateralized by tax receipts. The new loans have lower coupons than the bonds, are illiquid, and have extended maturities, although the principal is unchanged. Domestic investors don't want to take a capital loss.

Even though the exchange is voluntary, S&P considers that its very existence constitutes a default. David Beers, S&P's head of sovereign ratings, says: "If you're doing a distressed debt exchange - if we're talking about some borrowing entity in financial distress, which Argentina unambiguously is - and if you ask the creditors to accept terms less favourable than that which they are presently getting, then that constitutes a default under S&P's methodology."

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