Argentina tries making peace
by Benedict Mander in Buenos Aires
Slowly but surely, Argentina is trying to persuade the international community that it is a normal country again, a reputation that it was forced to forfeit with the biggest default on sovereign debt in history five years ago.
After restructuring its debt with private bondholders in February 2005 and paying off the International Monetary Fund in full at the start of 2006, Argentina is now ready to tackle the $6.3bn of defaulted debt owed to the Paris Club, an informal group of official creditors.
Argentina is expected to make an offer to reprofile that debt by the end of this week as part of a broader strategy directed at improving international relations to help attract greater levels of foreign investment – widely agreed to be necessary for the country to keep growing at 8 to 9 per cent. This has already prompted President Néstor Kirchner – no great friend of the markets – to make a highly symbolic appearance at the New York Stock Exchange in September to ring the opening bell.
Argentina does not plan to cut the nominal value of its debt with the Paris Club, although it does want the maturities extended. Argentina is not expected to pay the Paris Club off in one go, however, as it did with the almost $10bn it owed the IMF using central bank reserves, even though they have recovered well beyond their pre-IMF payment levels, now surpassing $30bn.
How the Paris Club reacts to Argentina's offer remains to be seen. Members of the club are already riled by Argentina's proposals to pay its $1bn debt to Spain by 2012, giving the rest of the debt longer maturities.
Both Argentina and Spain argue that the loan should be dealt with separately as it was granted in exceptional circumstances as part of the notorious IMF-backed rescue package received in January 2001 before the crash. However, it is suggested that close trade and investment ties with Argentina are more important reasons for Spain's special treatment.
A person in the Argentine government admits that "political motives" underlie attempts to settle the debt with the 19 creditor countries of the Paris Club.
"The normalisation of the Paris Club debt is in the spirit of attracting investment as well as demonstrably improving Argentina's debt profile during this presidential term," said the person, who added that those who reject the offer "will have to wait".
Certainly, neither side wants that to happen.
"The sooner this issue is resolved, the better for the Argentine economy and our economic relationship – through more investment and closer financial co-operation," said a diplomatic source from Japan, one of Argentina's biggest creditors in the Paris Club, as well as Germany, France and the Netherlands.
Vladimir Werning, an economist at JPMorgan in New York, argues that Argentina has kept the Paris Club creditors waiting long enough already – against its best interests. "Argentina has taken a long time to do something that it could have put behind it much more quickly, which might have allowed more time and resources to focus on other forward-looking issues that are much more important," says Mr Werning, arguing that, by delaying, Argentina has also risked giving more concessions to the Paris Club than necessary – "just as it did with the private bondholders" last year.
Furthermore, it is not clear to what extent foreign investment in Argentina will increase as a direct result of an agreement with the Paris Club. "I don't buy the hypothesis that if you restructure a debt you are more likely to receive the investment that you desire as a country," Mr Werning says. Nevertheless, he admits that export credits that will become available to companies in countries that no longer hold defaulted Argentine debt may make a difference.
Sebastian Briozzo, an analyst at Standard and Poor's in Buenos Aires, also questions how great an impact a deal would have on investment, although he concedes that it will help Argentina's image abroad.
Whatever effect the normalising of Argentina's relations with the Paris Club may have on investment – which is at about 21.5 per cent of gross domestic product but with insufficient quantities directed towards expanding capacity, which is stretched in some sectors – it will not change its ability to access the international capital markets in general.
As well as having comfortable fiscal and current account surpluses, Argentina already enjoys ample access to the markets through local bond issues in Buenos Aires – which have recently been attracting great interest from foreign investors – and directly to Venezuelan banks, which then sell the debt on abroad.
Perhaps the last significant hurdle for Argentina to clear before its relations with international markets could be described as "normal" is to reach an agreement with the so-called "hold-out" investors who refused to accept the restructuring offer in February 2005.
But that may be some time in coming yet. "It would be wishful thinking for investors to believe that a deal with the Paris Club – which is something that Argentina cannot avoid doing – signals a different priority or time-frame in which Argentina might come around to discussing a deal with private creditors that bet wrongly in the debt exchange," Mr Werning says.
With easy access to the capital markets already, it is generally believed that Mr Kirchner has no interest in proposing a possibly politically damaging deal with the hold-out investors – with some $20bn of untendered debt still out there – at least until after presidential elections due in October, which, if he runs, he is expected to win.
Slowly but surely, Argentina is trying to persuade the international community that it is a normal country again, a reputation that it was forced to forfeit with the biggest default on sovereign debt in history five years ago.
After restructuring its debt with private bondholders in February 2005 and paying off the International Monetary Fund in full at the start of 2006, Argentina is now ready to tackle the $6.3bn of defaulted debt owed to the Paris Club, an informal group of official creditors.
Argentina is expected to make an offer to reprofile that debt by the end of this week as part of a broader strategy directed at improving international relations to help attract greater levels of foreign investment – widely agreed to be necessary for the country to keep growing at 8 to 9 per cent. This has already prompted President Néstor Kirchner – no great friend of the markets – to make a highly symbolic appearance at the New York Stock Exchange in September to ring the opening bell.
Argentina does not plan to cut the nominal value of its debt with the Paris Club, although it does want the maturities extended. Argentina is not expected to pay the Paris Club off in one go, however, as it did with the almost $10bn it owed the IMF using central bank reserves, even though they have recovered well beyond their pre-IMF payment levels, now surpassing $30bn.
How the Paris Club reacts to Argentina's offer remains to be seen. Members of the club are already riled by Argentina's proposals to pay its $1bn debt to Spain by 2012, giving the rest of the debt longer maturities.
Both Argentina and Spain argue that the loan should be dealt with separately as it was granted in exceptional circumstances as part of the notorious IMF-backed rescue package received in January 2001 before the crash. However, it is suggested that close trade and investment ties with Argentina are more important reasons for Spain's special treatment.
A person in the Argentine government admits that "political motives" underlie attempts to settle the debt with the 19 creditor countries of the Paris Club.
"The normalisation of the Paris Club debt is in the spirit of attracting investment as well as demonstrably improving Argentina's debt profile during this presidential term," said the person, who added that those who reject the offer "will have to wait".
Certainly, neither side wants that to happen.
"The sooner this issue is resolved, the better for the Argentine economy and our economic relationship – through more investment and closer financial co-operation," said a diplomatic source from Japan, one of Argentina's biggest creditors in the Paris Club, as well as Germany, France and the Netherlands.
Vladimir Werning, an economist at JPMorgan in New York, argues that Argentina has kept the Paris Club creditors waiting long enough already – against its best interests. "Argentina has taken a long time to do something that it could have put behind it much more quickly, which might have allowed more time and resources to focus on other forward-looking issues that are much more important," says Mr Werning, arguing that, by delaying, Argentina has also risked giving more concessions to the Paris Club than necessary – "just as it did with the private bondholders" last year.
Furthermore, it is not clear to what extent foreign investment in Argentina will increase as a direct result of an agreement with the Paris Club. "I don't buy the hypothesis that if you restructure a debt you are more likely to receive the investment that you desire as a country," Mr Werning says. Nevertheless, he admits that export credits that will become available to companies in countries that no longer hold defaulted Argentine debt may make a difference.
Sebastian Briozzo, an analyst at Standard and Poor's in Buenos Aires, also questions how great an impact a deal would have on investment, although he concedes that it will help Argentina's image abroad.
Whatever effect the normalising of Argentina's relations with the Paris Club may have on investment – which is at about 21.5 per cent of gross domestic product but with insufficient quantities directed towards expanding capacity, which is stretched in some sectors – it will not change its ability to access the international capital markets in general.
As well as having comfortable fiscal and current account surpluses, Argentina already enjoys ample access to the markets through local bond issues in Buenos Aires – which have recently been attracting great interest from foreign investors – and directly to Venezuelan banks, which then sell the debt on abroad.
Perhaps the last significant hurdle for Argentina to clear before its relations with international markets could be described as "normal" is to reach an agreement with the so-called "hold-out" investors who refused to accept the restructuring offer in February 2005.
But that may be some time in coming yet. "It would be wishful thinking for investors to believe that a deal with the Paris Club – which is something that Argentina cannot avoid doing – signals a different priority or time-frame in which Argentina might come around to discussing a deal with private creditors that bet wrongly in the debt exchange," Mr Werning says.
With easy access to the capital markets already, it is generally believed that Mr Kirchner has no interest in proposing a possibly politically damaging deal with the hold-out investors – with some $20bn of untendered debt still out there – at least until after presidential elections due in October, which, if he runs, he is expected to win.
posted by Alice at
Friday, December 15, 2006
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