Argentina: Finance Secretary Says Full Speed Ahead on

UNCLAS BUENOS AIRES 000118

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E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV PREL AR
SUBJECT: Argentina: Finance Secretary Says Full Speed Ahead on
Holdout Deal

REF: BUENOS AIRES 55

Summary

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1. (SBU) Argentine Finance Secretary Hernan Lorenzino stressed in
a February 1 meeting that the debt exchange is moving ahead at full
speed. He repeatedly emphasized that there are no political
obstacles to moving it forward and that the Central Bank and
Redrado affair is not affecting the transaction in any way. He
lauded the SEC's handling of the approval process, especially in
light of attempts by vulture funds to convince the agency to
disrupt the process. The GOA still hopes to launch the proposal in
February, but that depends on the SEC's response to the latest GOA
submissions in answer to SEC questions. When initiated, the deal
is expected to be open for thirty-days, to give small retail
investors adequate time to evaluate it and participate. Saying
that the pending offer is still worth more now -- 50 to 55 cents on
the dollar despite the recent decline in the bond market -- than
when originally formulated, Lorenzino expects a very high
institutional participation rate. On the Azurix ICSID case,
Lorenzino confirmed that negotiations are well advanced, but could
be complicated somewhat by the need to secure the approval of the
deal by the government of Buenos Aires Province. End Summary.



No Political Obstacles to Holdout Deal

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2. (SBU) On February 1,WHA/BSC Office Director Milton Drucker and
Dep EconCouns met with Secretary of Finance Hernan Lorenzino and
Undersecretary of Finance Adrian Cosentino to discuss the latest
developments with regard to the proposed GOA debt restructuring and
ICSID arbitration cases. Lorenzino welcomed the visit, which he
described as "timely," noting that the debt exchange offer is
moving ahead at full speed. He added that both the President and
Minister of Economy Boudou fully support the transaction and
emphasized repeatedly throughout the discussion that there are no
political obstacles to moving forward. He also said several times
that the Central Bank and Redrado affair is unrelated to the debt
transaction and is not affecting it.



SEC Approval Process Going Well

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3. (SBU) Lorenzino explained that as part of the approval process
for the debt restructuring, the U.S. Security and Exchange
Commission (SEC) requested fifty-one clarifications after reviewing
the GOA's over-300 page submission. The GOA submitted its response
on January 27 and is currently waiting for the SEC's final approval
or request for additional information, which he very much hoped
would not be as extensive as the first one. Following the SEC's
review, the GOA will file paperwork with securities regulatory
agencies in Luxemburg, Italy, and Japan, which generally wait to
begin their approval processes until after the SEC issues its final
approval. Lorenzino expressed satisfaction with how the SEC is


conducting itself, particularly in light of what he characterized
as "the extreme pressure the SEC is facing from lobbies and funds
unwilling to participate in the debt exchange." He explained that
"vulture funds" have made several negative presentations about the
GOA proposal to the SEC in the last few months, apparently drawing
on the Argentine press to dredge up information to support their
case, and quoting Argentine opposition figures who oppose the deal.




Hope for February Launch

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4. (SBU) Lorenzino said that the GOA hopes to be able to launch
the transaction in February. The expectation is that the deal will
remain open for a period of thirty-days to allow small retail
holders enough time to evaluate and then participate in the
exchange. Depending on the preliminary participation rate in the
transaction and in an effort to promote a higher participation rate
by retail investors, the GOA may consider extending the period
during which investors can decide to participate. He insisted that
the GOA is working to launch as soon as possible.



Composition of Holdouts

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5. (SBU) Secretary Lorenzino explained that the holdouts'
principal claims total USD 20 billion (without interest). Although
he said that it is impossible to know how the claims are divided
up, he indicated that the following is as good an estimate as
possible: USD 3 billion are held by several vulture funds, based
in the Cayman Islands. These funds are not willing to participate
in the exchange, and will continue to pursue legal remedies. USD
13-15 billion is held by institutional investors based mainly in
New York, Boston and London. These investors are enthusiastic at
the prospect of a deal. Finally, USD 2- 4 billion is held by small
retail investors, mainly in Europe.




6. (SBU) The great majority is from Italy, and there are some from
Germany and Japan as well. While the amount held by retail
investors is somewhat unclear, Lorenzino believes it is closer to
USD 2 billion than USD 4 billion, since he said that many of the
original retail investors sold their holdings of defaulted GOA
bonds to institutional investors. In a meeting last week, Italian
Embassy DCM Guglielmino told the DCM that Lorenzino had recently
been to Italy to garner GOI and investor support for the debt swap.
He said that there are about 180,000 small Italian investors who
still hold defaulted Argentine paper, down from about 400,000 at
the time of the actual default. The Italian government was hoping
that the GOA would be willing to sweeten the deal somewhat for
them, but Lorenzino indicated that the GOA had to offer the same
deal to all of the affected investors. In the meeting with
Drucker, Lorenzino noted that the 30-day subscription period was
intended as a sweetener for small investors, since the
institutional investors who wanted to participate would do so
immediately.

50-55 Cents on the Dollar

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7. (U) Lorenzino stated that in spite of the recent bond market
decline, the offer is still worth more than when the GOA started
working on it. Without going into much detail, he assessed that
the offer would end up being valued at around 50-55 cents on the
dollar. He said that most institutional investors would
participate since they had purchased their bonds at much lower
prices. Furthermore, he said that the spread between the old
eligible bonds and the new bonds has always been positive, which
makes the transaction attractive to these investors. However, this
is not the case for retail investors, who had generally purchased
their bonds at close to par value.



Azurix ICSID Case

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8. (U) Lorenzino confirmed that the GOA -- through the Treasury
Attorney's office (Procuracion General del Tesoro) -- and Azurix
are in negotiations and well on the way to reaching an agreement
and finalizing a term sheet. He added that the Azurix case is
complex as it involves the Province of Buenos Aires, which means
that any agreement reached by the Federal Government must also be
endorsed by the province. Drucker stressed the importance of
successfully concluding these negotiations, which would serve as a
precedent in dealing with other ICSID cases.




9. (U) Mr. Drucker has not seen this cable and requested that it
go out without his clearance.
MARTINEZ