http://www.nytimes.com/2001/10/30/business/worldbusiness/30ARGE.html
October 29, 2001 New York Times/Business
Argentina May Restructure Its Debt, Risking Default By JONATHAN FUERBRINGER
Argentine bond and stock prices fell sharply yesterday after the country's economy minister indicated that he wanted to voluntarily restructure Argentina's billions of dollars in public-sector debt, including that owned by foreigners.
Such a move acknowledged how much more serious the country's financial crisis is. The economic slowdown around the world after the terrorist attack on America is just deepening a recession in Argentina that already is more than three years old. And there are fewer and fewer spending cuts the country can make so that it can meet its interest and principal payments.
But some analysts argue that the effort to restructure the debt, although necessary to reduce the country's debt burden, could lead to a default. Some major credit agencies have said that even a voluntary restructuring of Argentina's debt would lead them to give the debt a default rating. But it is not clear if a voluntary restructuring would qualify as a legal default. Some analysts argue that it would not.
The news sent Argentine bonds prices down as much as 14 percent while yields on one benchmark bond soared to 45 percent. The yield on an index of Argentine bonds jumped to almost 20 percent points over comparable United States Treasury securities. The local stock market index, the Merval, plunged 8.76 percent.
Delays in new economic policy announcements from the government also made investors nervous yesterday, as did the resignation of Argentina's undersecretary of finance. Some analysts interpreted his resignation as a sign of disagreement within the government over how to resolve the country's debt problems.
Domingo Cavallo, the economy minister, acknowledged the new effort to manage the debt in an interview with the local newspaper La Nacion. Mr. Cavallo said that he wanted an "integral solution" to the country's debt problem "as soon as possible," according to a translation by BNP Paribas (news/quote). But he emphasized that he wanted such restructuring to be voluntary, adding that he did not like the word restructure because it seemed to imply coercion.
The newspaper also said that Mr. Cavallo had been working with Jacob Frenkel, a former top official of the International Monetary Fund and a former governor of the Bank of Israel. Mr. Frenkel is now the president of Merrill Lynch (news/quote) International.
A Merrill spokesman said nothing had been formalized with Argentina but confirmed there had been discussions about hiring Mr. Frenkel and Merrill.
Argentina has about $132 billion in public-sector debt, of which about $70 billion is in global bonds. Mr. Cavallo indicated that he wanted to swap this old, high-interest-rate debt for new securities that have a lower interest rate. He did not say how he would entice investors into such a swap, but indicated that Argentina would be better able to guarantee that the principle and interest would be paid.
Several analysts said that such a big swap, or restructuring, of debt would be hard to accomplish voluntarily. If it provided any major relief for Argentina from its burden of interest and principle payments it might turn out to be a very unattractive swap for investors. "If you do an exercise that massive on favorable terms, the chances that you will be successful with a voluntary restructuring is not very high," said Jose M. Barrionuevo, director of emerging markets strategy and economics at BNP Paribas.
Mr. Cavallo had been working on a swap of old debt for new, lower- interest debt with local banks and pension funds and apparently still wants to include this debt in any swap.
But some top credit rating agencies said that they would view such a swap as a default, even if voluntary.
In a statement on Oct. 16, Standard & Poor's said it regarded the completions of a debt exchange "as tantamount to a default — if the total value of the securities or cash offered is materially less than the originally contracted amount (even though it may be greater than the current depressed market value of the debt)."
S.& P. now rates Argentine sovereign debt a CCC+, which reflects a high probability default. D is the default rating.
On the other hand, many long-time analysts in the emerging market bond business view voluntary swaps of debt as a way to avoid default. "If an exchange is done in a voluntary manner that would not constitute a default," said Desmond Lachman, director of emerging markets economic research at Salomon smith Barney.
In June, Argentina swapped about $30 billion of debt that delayed current interest payments in exchange for high interest in the future and it was not a default. [end]