ARGENTINA: IMF enlisted
The government seems to have persuaded the IMF to help it come up with a link to economic performance to encourage foreign investors to accept its rescheduling proposals. Unlike the last series of Latin American sovereign debt workouts, investors in Argentine bonds are not prepared to take a cut in their principal. They are prepared to compromise, though, on interest
Argentina's finance secretary, Guillermo Nielsen, said that the government wants the IMF to advise it on how to restructure the country's US$76.7bn debt to private creditors. Other officials say that the country may seek an IMF guarantee (rather like the US Brady bonds in the 1980s) as part of the proposed three-year deal to restructure the country's debt to the Fund.
Were such a comprehensive restructuring to be achieved, it would be the largest rescheduling of sovereign debt, covering as it would almost 150 bonds.
Following President Néstor Kirchner's visit to Europe, where the bulk of Argentina's foreign bond investors are based, it is clear that bond holders are prepared to surrender some of their interest, but not to take a capital write-off.
Back of the envelope calculations reckon that on this basis, and assuming that Argentina will redirect only about a third of its current fiscal surplus to servicing the debt, benchmark Argentine bonds should be trading in the 20% of face value range, rather than twice that price, which they are currently fetching.
This valuation is in line with longstanding views of the weakness of the Argentine credit story held by leading emerging market debt fund managers. Some of the biggest players in this market have spurned Argentina, reckoning that the chances of it servicing its debt reliably are remote.
The IMF's involvement may change their minds. As recently as last month, the IMF's managing director Horst Köhler said that the Fund would not interfere with Argentina's private debt repay-ments, most of which are owed to institutions in the US, Europe, and Japan. This was taken to mean that the next IMF agreement would solely deal with Argentina's debt to multi-lateral lenders, which is currently covered by a US$16.1bn agreement, reached in January, that expires at the end of August.
The IMF now seems to have changed its mind, even sending one of its technical advisors to help Argentina formulate a strategy for dealing with its private debt. The appointment of the Argentine, Eduardo Borensztein, who will work within the finance ministry, has further raised expectations that the government will link repayments of defaulted bonds to Argentina's overall economic performance in the coming years.
Creditors are likely to get a variety of options, all of which will involve them swallowing a major loss plus an extension of maturities. The carrot will be the (unprecedented) IMF guarantee.
The proposed deal is likely to be launched officially at the IMF's Annual General Meeting, which starts in Dubai on 23 September.