Newsroom: Article

Emerging Market De(bt)velopments

At the beginning of September 2008, Cristina Fernandez, president of Argentina, announced that Argentina would repay $6.71bn of defaulted debt it owes to the Paris Club. The defaulted debt is mainly owed to Germany (30%), Japan (25%), the Netherlands (9%), Italy (8%), Spain (8%) and the United States (7%). Argentina had steadfastly refused to use central bank reserves to pay back the Paris Club, until now, despite the fact that the default was blocking as much as $8bn in much-needed foreign investment to the country.

The announcement came amid fears of another default by Argentina, mainly sparked by the sale of a seven-year bond to Venezuela at a yield of 15%, two percentage points higher than the bond sale to Venezuela in May 2008, and 729 basis points over those of the US treasury. The news of this sale was generally perceived as the move of a desperate lender in urgent need of funding. Confidence further deteriorated after it became clear that Venezuela immediately re-sold the bonds, forcing Argentina to buy-back government debt in an effort to restore confidence.

The fears of a default by Argentina have, among others, resulted in a capital flight of $8bn in the second quarter of 2008. Public debt currently stands at 50% of gross domestic product (GDP), which is only marginally lower than the level (53%) immediately before the financial crisis of 2001. Although the ratio then was artificially depressed by currency overvaluation within the framework of a currency board, the current figure does not include $23.5bn in debt held by the so-called holdouts ¨C those who refused to accept the terms of the 2005 restructuring. If this was included, the ratio would be over 60% of GDP, which is very high for a middle-income emerging market with a strong fiscal dependence on commodity prices.

Boosted by high commodity prices and strong external demand, Argentina has achieved annual growth averaging almost 9% since 2003 when a powerful rebound from the 2001-02 financial crisis got under way. But commodity prices are falling and the economy is cooling down. The Economist Intelligence Unit forecasts growth of 6% in 2008 and 3.5% in 2009. This will be reflected in smaller overall and primary fiscal surpluses. In addition to that, the annual inflation rate is currently around 9% according to official statistics, but private estimates put it at about 25%.

A debt default is unlikely in the next twelve months, partly because the central bank has reserves of more than $47bn, sufficient to cover the country¡¯s remaining debt-repayment obligations and partly because of the current fiscal surplus. The Economist Intelligence Unit is currently maintaining its B risk-rating and stable outlook for Argentina¡¯s sovereign debt. However, the status quo is not sustainable indefinitely and a change in the outlook, possibly followed by a downgrade, is in prospect during 2009 if the government fails to take steps to regain access to international capital markets.

Paying the creditors of the Paris Club in one swoop will work out more expensive than renegotiating the debt. Argentina has chosen this expensive solution as renegotiating the debt would mean an obliged cooperation with the International Monetary Fund (IMF), which Argentina refuses to do. In 2006, Argentina paid off the country¡¯s $9.5bn IMF debt in a similar operation, indicating that it will refrain from cooperating with the IMF for the foreseeable future.

The positive consequence of the payment could be a clearing of the way for European companies to invest more in Argentine projects. It should open new avenues of credit, including certain loan guarantees and insurance arrangements that European companies obtain from their own governments to invest in long-term projects in Argentina. However, the measure will do nothing to improve Argentina¡¯s access to financial markets or ease the government¡¯s forced reliance on Venezuela for financing.

To regain access to the international capital markets, the government needs to resolve the stand-off with the hold-outs ¨C holders of $23.5bn of defaulted bonds. Although the hold-outs rejected the original offer, they might accept similar terms today, given the premium on cash in the current uncertain times.

As mentioned above, it seems that the conditions in the world economy are becoming less favourable for Argentina, which would most probably lead to increasing financial pressure for the Argentinean government. Access to funding, either domestically or internationally, will become more important given the potential impact of the deteriorating macroeconomic conditions on the income of Argentina. The recent move from Argentina to repay the defaulted debt from the Paris Club creditors is a good first step in unblocking foreign investments. However, a resolution of the hold-out issue is crucial for Argentina to regain access to international capital markets and to prevent a default.

Holders of Argentinean sovereign trade debt are invited to contact us for advice on any questions relating to (potential) defaults or the possibility of trading out of risk positions.

LEGEND:
Trade : Trade Debt Instruments
Loans: Loan Agreements
PDI: Past Due Interest
Pns: Promissory Notes
Pars: Brady Par Bonds
FTO: Foreign Trade Organisation FSU
¡ü¡ý: Changes compared to last edition

Prices are a percentage of principal only, however assuming inclusion of an average amount of PDI for the specific debt instrument and the specific debtor. Trade debts and their documentation differ from case to case and price ranges should therefore be considered as benchmark only.

Price ranges are based on a monthly compilation of sources and analytics. Liquidity on most instruments is very limited and trading may not have taken place for some time.

Prices of debts of other countries and/or other classes are available on request.

A.R. Thiescheffer on thiescheffer@omnibridgeway.com
H. Rijkens on rijkens@omnibridgeway.com

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