Cool response to Argentina debt plan

Almost two years after Argentina defaulted on its debt repayments in December 2001, the country has announced initial plans to restructure its $94 billion worth of bonds. However it looks unlikely that these first proposals will be accepted unchanged.

The proposals recommend a 75% reduction in the value of the bonds and accumulated interest payments be cancelled. Since this interest amounts to roughly $5 billion each year, the plan means bondholders would lose an additional $10 billion.

According to the Argentine government, existing bonds would be cancelled and bondholders given newly issued bonds. However, the timing of the new exchange and how any bonds would be structured is still unclear.

Representatives for Italian bondholders, the country with the most holders of Argentina bonds, who met with Argentina’s finance minister Guillermo Nielson, had called for a debt swap by June 2004. However whether this is possible or likely is uncertain.

The seemingly arbitrary figure of a 75% haircut has also confused bondholders. Many feel the number represents a suspiciously round number which would not cause Argentina too much trouble to pay. Traders in illiquid emerging markets debt have suggested that the Argentine government has set the low figure in an attempt to talk down the value of the debt so a new offer would appear more generous than it really is.

Argentina’s moves towards resolving the issue should disrupt attempts by bondholders to seize assets belonging to the country – both in Argentina and abroad.

In mid-September, shortly before the proposed debt restructuring, New York judge Thomas Griesa gave the Argentine government 45 days to resolve the issue before creditors could begin laying claim to assets.

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