Abgeschickt von rolf am 13 Januar, 2006 um 23:35:05
FIXED INCOME RESEARCH / EMERGING MARKETS
EM SOVEREIGN / LATIN AMERICA
Bear, Stearns & Co. Inc.
Friday, January 13, 2006
Argentina Sovereign Update: Rumors of an Eventual
Reopening Continue
Summary
�� Ambito Financiero reported some weeks ago that the Argentine government was thinking seriously
about the possibility of reopening the debt exchange to the holdout community. The statement was
strongly denied by the government the following day. Nevertheless, the talk has, interestingly
enough, not ceased to flow through the markets.
�� From a long-term perspective, the theoretical normalization of US$19.6 billion in liabilities would
be a material positive. Argentina’s current debt load stands at around US$126 billion (69% of GDP),
according to the official information. That said, the official information accounts for the holdout
liability, as if it had participated in the exchange. Without such a provision, the debt load accounts
for US$135 billion, or 74% of 2005 dollar GDP.
�� The lingering talk of an eventual reopening of the exchange is suspicious, in our view. To this end,
we now believe that there is a better than 50% chance that we will see such a headline in the future.
Overview
Ambito Financiero reported some weeks ago—immediately after Argentina decided to repay the IMF in
full—that the Argentine government was thinking seriously about the possibility of reopening the debt
exchange to the hold-out community. The statement was strongly denied by the government the
following day. Nevertheless, the talk has, interestingly enough, not ceased to flow through the markets.
In fact, according to our sources, it has increased in the last few days. Furthermore, the news that the
government will go ahead very soon with a proposal to restructure the terms of defaulted bi-lateral debt
is also supportive of the thesis that the Ministry of Economics appears to be finally finding value added
in the idea of reaching a full normalization of the Republic’s indebtness status.
Despite the lingering talk, markets are still not paying much attention to the news. Performing debt has
been trading reasonably well since the start of the year, and non-performing debt remains stagnant in the
$30s. This is not logical behavior under an expectation of a swap reopening, however, as the reopening
of the exchange implies increased supply of performing debt and dwindling supply of non-performing
debt.
In any case, we believe that if the exchange is reopened, European retail accounts would take advantage
of a reopening of the exchange under almost all possible terms, as we believe that four years without
interests likely implies a high opportunity cost for many of these small investors. The problem remains of
trying to establish how many of those retail accounts are still holding those defaulted bonds, as a large
portion of those accounts could have perhaps already “given up” and, therefore, decided to sell their
assets.
We believe that professional investors are unlikely to tender in an eventual reopening, unless the
reopening delivers better terms compared with the ones offered in the first transaction. We view that as
unlikely, however, as the prospectus of the 2005 exchange clearly delineated that if better terms were to be offered at any point in the future to any investor, such a deal needed to be retroactive. The exception
has to do with private settlements, of course, as the terms of such arrangements are not public.
Debt Dynamics
From a long-term perspective, the theoretical normalization of US$19.6 billion in liabilities would be a
material positive occurrence for this country. Argentina’s current debt load stands at around US$126
billion (69% of GDP), according to the official information. That said, the official information accounts
for the holdout liability, as if it had participated in the exchange. Without such a provision, the debt load
accounts for US$135 billion, or 74% of 2005 dollar GDP. In other words, the normalization of the
US$19.6 billion would reduce the debt/GDP level by that 5% of GDP difference. The normalization of
the servicing of defaulted debt will likely increase debt servicing costs by US$650 million per year, or
0.3% of GDP. Argentina is currently utilizing 2.6% of GDP to service its debt, one of the lowest loads in
the region.According to our calculations, Public Debt is growing at a rate of about US$1.2 billion per year because
of high inflation, but the increase in the size of the nominal GDP (because of growth and inflation) and
the continued appreciation of the real exchange rate will continue to push upwards the size of the dollar
economy. Thus, the debt/GDP ratio should continue to fall in the years ahead (see graph above).Conclusion
We believe that the lingering talk of an eventual reopening of the exchange is somewhat suspect. To this
end, we now believe that there is a better than 50% chance that we will see such a headline in the future.
We believe that a decision to reopen the exchange would likely reduce the size of the holdout community
in a material fashion, and would be a positive from the fundamental side of the equation. In the short run,
an increase in the supply of performing debt will have an initial effect on prices, no doubt, but we believe
that the effect will not be dramatic, as increased normalization of the debt is a natural longer-term
positive occurrence. Hence, we believe that holding a marketperform on performing debt, despite the
risk of an eventual reopening (i.e. increased supply) taking place, still makes good sense.