Argentina's Hardball May Pay
Majority of Bondholders Are Expected to Take 30 Cents on Dollar By CRAIG KARMIN and MARK WHITEHOUSE Staff Reporters of THE WALL STREET JOURNAL March 3, 2005; Page C16
After years of heated exchanges and court battles, Argentina is set to announce today the results of debt restructuring on a record $103 billion government default in late 2001.
Buenos Aires offered its creditors about 30 cents on the dollar. The offer was non-negotiable, and the lowest amount on a dollar-denominated debt default in the modern capitalist era. Yet about three-quarters of the bondholders are expected to accept.
While that may be good news for Argentina, for the broader emerging bond market, it could prove much less cheerful. The consequences of a default are so punishing that few investors think Argentina's experience of spiraling unemployment, rising crime and political unrest will encourage other countries to suspend interest payments. But Argentina's example may encourage any country that may default next to take an equally hard line with their creditors.
"Countries will probably think that once they do default, they can get a lot tougher with bondholders," says Tom Cooper, an emerging-market debt manager at GMO in Boston, a global money manager that rejected Argentina's offer. "Assumptions about default recoveries may have to be ratcheted down."
Christian Stracke, an emerging-market analyst with CreditSights, an independent credit-analysis company, thinks the ramifications could be even worse. "The big thing to take away is that Argentina will have done a restructuring that was involuntary and hurt bondholders," he says. "This might make investors more willing to sell bonds quickly if another country looks like it's getting into trouble."
Whether there is any near-term effect on the market is another question. Bondholders have notoriously short memories, and emerging-market debt has been a top performer despite Argentina: From 2002 to 2004, J.P. Morgan's Emerging Bond Market Index Plus returned 65%, and money has poured into emerging-market bond funds at a record pace.
Compared with previous defaults, Argentina's offer looks stingy. The Russian government promised 50 cents on the dollar to its foreign bondholders following its 1998 default, while Ecuador offered 60 cents after a 1999 default. Both governments conducted extensive negotiations with their creditors and, as a result, were able to win over more than 90% of their bondholders.
Argentina, by contrast, has taken a more contentious stance with its creditors. The government plans to take the defaulted bonds out of circulation in major markets, making any old bonds even harder to trade and reducing any potential value further. Buenos Aires also passed a law prohibiting the government from ever offering better terms.
While many European retail bondholders appear to have rejected the offer -- a group of Italian consumer associations said this week that nearly 60% of the 450,000 Italians said "no" -- the vast majority of Argentine bondholders have knuckled under to government pressure.
If a better than 70% acceptance rate pans out, it would represent a considerably higher acceptance rate than earlier estimates of only 50% participation, and it would cap an impressive turnaround from the painful recession that followed the December 2001 default. Argentina's economy has been growing about 9% annually in the past two years, and its stock market, up 48% since the end of 2003, is booming again.
Argentina's path to recovery is also being smoothed by Wall Street. Over the years, the big firms have done a lot of underwriting and lending business with Argentina and, for the most part, have advised bondholders take the offer.
Deutsche Bank, for instance, wrote in a recent client note advocating the deal: "We do believe that Argentina could afford to service better terms than are provided by the current offer...[but] with the international community apparently unwilling to apply any significant pressure on Argentina to improve the terms, bondholders are left with little leverage."
J.P. Morgan, meanwhile, is poised to increase Argentina's weightings in its indexes by the end of next month. The country's bonds currently account for 1.8% of the emerging-markets index, but J.P. Morgan estimates that weighting will rise to a range of 2.7% to 3.3%, depending on how many bondholders accept the offer and how many elect to receive the restructured bonds in dollars rather than Argentine pesos.
Standard & Poor's also is getting involved. The credit-rating firm plans to assign the government's debt a B-minus rating, which means S&P's analysts expect it to survive at least one year without defaulting again.