Reuters Securities WORLDBONDS-Bondholders pan US intl bankruptcy plan
By Hugh Bronstein
NEW YORK, April 15 (Reuters) - While Washington's plan for a new system governing emerging-market bond restructurings may make the process less messy by curtailing creditor lawsuits against defaulting governments, investors say that under the new plan those governments would pay dearly to issue debt. ADVERTISEMENT
``If the U.S. Treasury wants to make it easier to default, they're going to force countries to pay more to issue debt. Period,'' said Jim Barrineau, a vice president in emerging markets research at Alliance Capital Management.
``No bondholder is going to agree to make it easier for a country to default.''
The idea, offered by the U.S. Treasury Department, is to establish a more orderly process by which countries can admit their insolvency and move to correct it without the threat of creditor lawsuits.
There would be a cooling down period immediately after a default takes place. Then if a majority of bondholders votes to accept a restructuring deal, so-called rogue creditors would not be allowed to hold out for better terms.
Emerging market sovereign bond contracts would contain clauses intended to bolster confidence in the market by reducing the risk that defaults can become so messy that other countries suffer financial contagion.
But bondholders say the only certainty offered by such a system would be that they will make governments compensate them for the loss of their bargaining power.
``In the future, when bonds come with those clauses, they'll trade at a discount to bonds without those clauses,'' Barrineau said.
Robert Koenigsberger, managing director of Gramercy advisors, a Connecticut-based firm that manages an emerging markets fund, agreed.
``You want us to give up the right to sue on future deals? Sure, we'll put a price on that and no one will want to buy it,'' Koenigsberger said.
``That's what markets are about. You offer something and we decide at what price we want to take it.''
NOT BROKEN? DON'T FIX IT
Investors point out that only one minor creditor has brought legal action against Argentina in the wake of the country's default three months ago. Financial contagion from Argentina meanwhile has been minimal, they note.
The U.S. proposal is designed to reduce what is called ``moral hazard'' -- the phenomenon of investors buying risky bonds only to demand repayment at higher prices even in the midst of financial crises.
``Treasury's proposal grossly exaggerates a couple of perceived problems -- namely moral hazard and rogue creditors -- and applies a relatively high-risk strategy for addressing those problems,'' said Mark Siegel, an emerging market fund manager with D.L. Babson & Co., a member of the MassMutual Financial Group.
``The risk is that this could substantially increase borrowing cost and reduce capital flows to emerging market countries as the terms of the bonds look increasingly complex and decreasingly attractive.''
LITTLE HOPE FOR AN IMF PLAN
The International Monetary Fund has made a proposal for a more comprehensive solution that would allow countries to file for bankruptcy in a way similar to the method used by insolvent companies.
But the Treasury has not wholeheartedly backed that idea and, as the United States is the largest shareholder in the IMF, Wall Street expects Treasury's view to prevail.
Arturo Porzecanski, head of emerging markets economic and debt strategy at ABN-AMRO said the critical problem is not creditor lawsuits but selective U.S.-backed IMF bailouts of some countries while others are left to fester.
He cited the example of Turkey, a strategically important country that borders Iraq and continues to receive IMF assistance despite its history of questionable economic management. Meanwhile Argentina has been cut off.
``I find it ironic that the people who brought us these distortions in the international capital markets are trying to do us a favor by reducing uncertainties that we do not have,'' Porzecanski said.
ELLIOTT VS PERU
In the back of everyone's mind is the case several years ago in which Elliott Associates, a New York-based investment firm, pushed Peru to the brink of a Brady bond default.
While this case is commonly cited as evidence that creditors should have their wings clipped, Elliott portfolio manager Jay Newman told Reuters that the firm never threatened Peru's 1996 Brady bond restructuring.
Elliott filed suit in October 1995, asking to be paid on $20 million of defaulted Peruvian debt plus interest and penalties, Newman noted. The suit was resolved four years later by the Second Circuit Court of Appeals, which decided in Elliott's favor by reversing a lower court ruling.
A year after that, the firm obtained a final judgment for $57 million. Newman said that when Peru refused to honor the U.S. court decision or to post a bond pending appeal to the U.S. Supreme Court, Elliott began enforcement proceedings that restrained the government from paying interest to other creditors unless Elliott was paid as well.
``We never sought to block or attach any assets that Peru needed to complete its 1996 Brady restructuring,'' Newman said. ``I am not aware of any case in which a creditor has delayed or obstructed a sovereign restructuring through litigation or otherwise.''