Brazil & Southern Cone - 26 October 2004

On 6 October the Argentine economy ministry outlined its timetable for restructuring its US$88bn defaulted commercial debt. According to the schedule, the whole process will take place between 15 November and 17 December. By January 2005, the government reckons, no one will be discussing Argentina's defaulted debt any more.

Markets remain unconvinced
Such confidence is remarkable given that there has been no sign of a breakthrough in the stalemate between the government and international bondholders, who are still determined that Argentina will honour more than the 25% face value of the debt it is currently prepared to recognise. When the final debt offer is handed over to the US Securities and Exchange Commission (SEC) sometime before the end of October, there is little hope of a major improvement in the offer.

It is, therefore, difficult to see how the government will close a satisfactory deal by the end of this year, especially as it wants at least 66% of bondholders to accept the offer. Argentina's President Néstor Kirchner might give the impression that he doesn't mind how many creditors accept the offer, but he knows that Argentina's credibility, and its future access to the financial markets, hang on what happens over the next two months.

So while Kirchner is at home publicly defying criticism from abroad - for example, he called the IMF's managing director Rodrigo Rato a 'plantation owner' for criticising Argentina's debt negotiations - his ministers have been hard at work selling the deal. Most recently, Finance Minister Guillermo Nielsen and his deputy, Sebastián Palla, have been touring Europe to persuade banks and bondholders to accept the proposal to varying degrees of success.

A boost from the pension funds?
Despite the impasse, the government has one substantial achievement - the deal it struck in October with the Argentine pension funds, which hold around 17% of the bonds. The pension funds, otherwise known as the AFJP, were won over when the government offered to swap some US$1.6bn in defaulted treasury bills they were forced to accept in 2001 with new bonds with a shorter maturity than the bonds being offered to international creditors.

The AFJP's acceptance has kick-started the debt-swap, and increased optimism that a deal might yet be done. However, this might merely be because the government has at long last shown a willingness to compromise.

As Nicola Stock, who heads the influential Global Commission of Argentine Bondholders (GCAB), said on 15 October: 'If Argentina had to employ additional incentives to attract Argentine creditors over whom it exerts considerable regulatory control we can only speculate on the additional incentives it should afford to reach an accord with its global creditors.' The GCAB, which controls about US$38bn worth of defaulted debt, viewed the deal with the pensions fund as 'another violation of Argentina's commitment to the global credit markets to enter into good faith negotiations'.

The prospects for a successful deal are very unsure, especially after the province of Mendoza successfully completed its own debt-restructuring on 22 October, achieving a 64% acceptance rate for what has widely been viewed as a dry-run for the main process. The government was happy with the result, but others pointed to the fact Mendoza's offer was considerably better than what the federal government is proposing.