Screeching to the precipice

Feb 28th 2005
From The Economist Global Agenda

Argentina appears to have persuaded most of its bondholders to accept a deeply discounted debt-restructuring offer. But the country’s financing problems will continue unless it can coax back capital stashed abroad by its citizens

WHEN Argentina started restructuring its $81 billion-plus-interest in defaulted debt last month, it was billed as the biggest game of chicken in financial history: the government vowed not to improve its offer, worth broadly 30 cents on the dollar, and bondholders promised never to accept it. Now it seems that despite their threats of lawsuits, asset seizures and collective rejection of the Argentine ultimatum, the creditors swerved practically before they got into the car.

Not so long ago, most analysts were predicting that at best 70% of bondholders would accept the offer, which closed on Friday February 25th. Most now reckon that as many as 80% of creditors have participated. The Argentine Bond Restructuring Agency, which represents little guys in Germany and Austria, accepted the deal at the last minute. And a significant number of other retail investors, tired of the hassle, may have sold out to more sophisticated players who hope to take quick profits once Argentina is re-admitted into the emerging-market bond index. The official results may not be announced until Thursday. But if the acceptance rate is as high as reports now suggest, it should win the blessing of the International Monetary Fund (IMF), which must decide whether to roll over the $14 billion Argentina still owes it.

The success of the government’s negotiating strategy—which was not to negotiate at all but to offer a take-it-or-leave-it package instead—is a political triumph for Argentina’s president, Néstor Kirchner. As his Peronist party heads into legislative elections in the autumn, he can claim that he faced down the foreigners and won.

The foreigners have been chasing their claims since Argentina’s government stopped servicing its debt more than three years ago, on December 23rd 2001. It was the biggest sovereign default in history. Despite liberal help from the IMF, the government could not meet the punishing yields exacted by skittish investors or balance its books in the midst of a protracted recession. It devalued the peso, then decoupled it altogether from the dollar, dismantling the “convertibility system” that had killed hyperinflation a decade before. At its worst, the peso lost three-quarters of its value, wreaking havoc on the finances of banks, companies and households, which could no longer meet their dollar liabilities. But hyperinflation did not return, and after the economic meltdown of 2002, Argentina’s newly competitive exchange rate helped it grow once again.

Standard & Poor’s, a rating agency, has said that after the restructuring it will rate Argentina a B-minus debtor, a status that Ecuador did not attain for five years after its default. Foreigners will probably not want to lend to the Argentine government directly for a while after taking a 70% loss—twice the average haircut in recent sovereign defaults—and the government will still be left with a public debt equal to 80% or more of GDP. But the country’s new credit rating should increase access to capital for its best-behaved companies. Other immediate benefits include a smaller chance that lawsuits against the government will succeed and a better relationship with the IMF, which might allow Argentina more time to repay the Fund money it owes and soften the conditions that govern the debt.

Most important, greater confidence in Argentina (and its soaring equity markets) may bring home some of the $150 billion or so its citizens hold abroad. The return of flight capital is a practical necessity for the country to keep growing. Its galloping GDP growth, 8.8% in both 2003 and 2004, owes a lot to high soyabean prices and the use of capacity left idle by the economic collapse in 2001-02. Commodity prices have already declined from their peaks and capacity constraints are likely to be felt again this year, so fresh capital will be needed. Mr Kirchner has hardly wooed external direct investors: his government is yet to lift the freeze imposed during the crisis on rates charged by most foreign-owned utility firms. This has exacerbated worries that contracts in Argentina are not worth the paper they are printed on.
The president seems to be betting that a successful restructuring will increase domestic investment from its current level of 17% of GDP to more than 20%, enough to sustain impressive growth throughout the economic cycle. Only time will tell if the Argentines cheering his “patriotic” intransigence towards the international financial community are willing and able to shoulder the burden themselves.

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