Identifier
Created
Classification
Origin
08BUENOSAIRES1396
2008-10-09 19:54:00
CONFIDENTIAL
Embassy Buenos Aires
Cable title:  

GLOBAL ECONOMIC CRISIS COMPLICATES ARGENTINA'S

Tags:  EFIN ECON ETRD PREL AR 
pdf how-to read a cable
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C O N F I D E N T I A L SECTION 01 OF 02 BUENOS AIRES 001396 

SIPDIS

E.O. 12958: DECL: 10/08/2028
TAGS: EFIN ECON ETRD PREL AR
SUBJECT: GLOBAL ECONOMIC CRISIS COMPLICATES ARGENTINA'S
RE-OPENING OF THE DEBT EXCHANGE FOR HOLDOUTS

REF: A. BUENOS AIRES 1330

B. BUENOS AIRES 1312

Classified By: Ambassador E.A. Wayne for Reasons 1.4 (b,d)

-------
Summary
-------

C O N F I D E N T I A L SECTION 01 OF 02 BUENOS AIRES 001396

SIPDIS

E.O. 12958: DECL: 10/08/2028
TAGS: EFIN ECON ETRD PREL AR
SUBJECT: GLOBAL ECONOMIC CRISIS COMPLICATES ARGENTINA'S
RE-OPENING OF THE DEBT EXCHANGE FOR HOLDOUTS

REF: A. BUENOS AIRES 1330

B. BUENOS AIRES 1312

Classified By: Ambassador E.A. Wayne for Reasons 1.4 (b,d)

--------------
Summary
--------------


1. (C) The global financial crisis is complicating
negotiations between private foreign banks and the GoA over
the reopening of both the debt exchange to Holdout
bondholders and the simultaneous debt swap for bonds coming
due 2009-2011. GoA and Citibank contacts confirm that no
deals are possible in the current market, given that yields
on Argentine sovereign bonds have spiked over 20% in recent
weeks. Nevertheless, the two sides hope to complete
negotiations over the next few months to have the two
transactions ready to launch as soon as there is a market
window. A further complication is that the these two debt
exchanges and the Paris Club payment are inter-connected, and
the individual success of each may require the successful
completion of the other. End Summary.


2. (U) This is the second of two cables on the impact of the
financial crisis on the GoA's proposed debt deals. Septel
discusses speculation that the GoA may delay completion of
payment to Paris Club creditors.

--------------
Status on Re-opening the Debt Exchange
--------------


3. (SBU) Although it is getting less press attention than
similar concerns about the GoA's ability/willingness to go
through with the full payment of Paris Club arrears (septel),
the financial crisis is also complicating efforts of a group
of foreign banks and the GoA to negotiate a new debt exchange
for holders of $19.5 billion face value of untendered debt
(see Ref A for background). (These are the so-called
"holdout" bondholders, who refused to participate in the 2005
debt exchange stemming from the GoA's December 2001 default).



4. (C) This debt exchange proposal is linked to the
simultaneous mini-debt swap of Argentine debt coming due
2009-2011 (see Para 10 below),which is similarly constrained
by recent events. On October 7, Juan Jose Bruchou (PROTECT),
President of Citi-Argentina, which is involved in both deals,

told Ambassador Wayne that neither deal is possible in the
current market, given that yields on Argentine bonds have
leapt from around 17% to 23% since CFK announced September 22
that the GoA would consider entering into these arrangements.
(Full conversation with Bruchou reported septel.)


5. (C) Cabinet Chief Sergio Massa and the organizing banks
(Barclays, Citi, Deutsche Bank) met September 26 to go over
the broad outlines of the deals. Based on the positive
results of this meeting, Finance Secretary Lorenzino led an
Economy Ministry team to New York on October 1 to meet with
the GoA's lawyers (Cleary Gottlieb),meet with the U.S. SEC,
and begin technical talks with the three banks. Norberto
Lopez Isnardi (PROTECT),Director of Public Credit at the
Ministry of Economy (reporting to Finance Secretary Hernan
Lorenzino),told Econoff October 7 that the visit went well,
but reiterated Citi President Bruchou's comment that in the
current market there is no deal. However, Lopez pointed out
that since negotiations and the documentation process would
take two to three months to complete, the two sides will get
the two transactions ready to launch as soon as there is a
market window.


6. (C) Despite the constant press speculation about the
details of the Holdout debt exchange, Economy Ministry and
Citibank contacts confirm to Post that the two sides have
only agreed on broad parameters. However, the key features
include an exchange of instruments and the promise of new
money. At present, the complication for both of these
aspects is that Argentine debt yields, which were already
well above emerging markets averages, have spiked in recent
weeks in response to the financial crisis. At current
yields, therefore, the offers are too expensive for the GoA
and unattractive for potential participants.


7. (SBU) First, the value of the U.S. dollar-denominated
Discount bonds (maturing in 2033) that will be swapped for
the untendered bonds have fallen significantly (yields on
these Discount 33s have increased to 18.2% as of October 8

BUENOS AIR 00001396 002 OF 002


from 11.25% in late August). The value of the GDP Warrant
that will also be issued in the deal has also fallen (from a
high of over $10 per 100 warrants in late August to $6 per
100 warrants on October 8). This makes the deal less
attractive to Holdouts. Second, the deal requires
participants to pony up new cash, for which they will receive
10-year USD-denominated bonds.


8. (C) Since yields on these bonds have jumped recently over
20%, the issuance would either be extremely expensive for the
GoA or participants would have to accept a bond with a lower
yield, which would immediately drop in value. Either way, it
will not work until Argentine debt prices recover
significantly. (Norberto Lopez Isnardi told Econoffs that
the two sides are analyzing options that include excluding
retail investors from the new-cash requirement and -- if
market conditions allow -- opening a stand-alone cash
tranche.)


9. (C) According to Norberto Lopez Isnardi, Finance Secretary
Lorenzino believes the GoA will easily convince Congress to
approve a new law authorizing the re-opening of the debt
exchange. At present, the GoA plans to send a bill to
Congress as soon as it reaches agreement with the banks on
main guidelines of the exchange and started the legal process
(e.g., filing with the SEC, preparing the prospectus).

-------------- --------------
Mini Exchange Faces Legal and Financial Challenges
-------------- --------------


10. (C) The GoA, Barclays, Citi, and Deutsche Bank are
simultaneously negotiating a mini-debt exchange of local
debt, with the goal of smoothing the GoA's maturity profile
for 2009-2011. (The GoA's financing needs increase by about
50% during this period.) The timeline will be similar to the
larger debt swap (completion by year-end). However, since it
also has a new money element, both Citi's Bruchou and the
Economy Ministry's Norberto Lopez Isnardi say it faces the
same challenges as the holdout debt swap and cannot be
completed in the current environment.


11. (C) This debt swap also faces serious legal hurdles, due
to the Holdout lawsuit that succeeded in convincing New York
Southern District Court Judge Thomas Griesa to freeze a stock
of "Global bonds" backing the Guaranteed Loans that comprise
a significant portion of the exchange. GoA lawyers Cleary,
Gottlieb hope to meet with Judge Griesa soon to explain the
progress of both debt swap transactions, in the hopes that
Griesa will change his attitude about Argentina and allow the
transactions to go through. (Judge Griesa is reportedly so
completely fed up with Argentina that he refuses to allow
Cleary Gottlieb lawyers to speak in court.)

--------------
Comment
--------------


12. (C) Another complicating factor is that these two deals
and the GoA's plan to pay Paris Club creditors are not
mutually exclusive. On the contrary, they are
inter-connected and it may be difficult to do any of the
three alone. As an explanation, Senior BCRA officials tell
Econoff that the announcement of the debt swaps might not
have even happened if the GoA had not botched the Paris Club
announcement. The GoA's surprise announcement that it would
use reserves to pay Paris Club prejudiced the BCRA's legal
position in the New York court case with Holdout bondholders
over $105 million in frozen BCRA reserves, because it
undermined the BCRA's argument that it is an independent body
and the reserves do not belong to the GoA (see Ref B for
background). Therefore, re-opening the debt exchange will
strengthen their position in this and other Holdout lawsuits,
since it will show Judge Griesa that the GoA is finally
addressing this long outstanding issue. However, for the
holdout swap to be successful, it requires a significant
improvement in the yields on GoA bonds offered in exchange
for tendered holdout debt and guaranteed loans as well as
"new money" GoA bonds that are an integral part of the
re-financing package under consideration. Ironically, the
effects of global turmoil aside, one reason Argentine yields
are so high is due to concerns about the GoA's ability to
meet its debt obligations during 2009-2011. Therefore, BCRA
officials believe that completing the mini-swap and smoothing
out the amortization schedule should greatly alleviate this
concern and result in reduced debt yields.
WAYNE