Argentina: A Debt Swap Stumble?

And they thought they were done!!!

Think again!!

I think you will enjoy this intelligence report from STRATFOR.

U.S. federal judge Thomas P. Griesa of the Southern District of New York on May 25 froze $2.43 billion of Argentine assets held by the state-run Banco de la Nacion Argentina branch in New York. This follows Griesa’s Jan. 12 freezing of $1.7 billion in assets held by the Argentine central bank in the United States and April 7 ruling that Argentina’s central bank and the government were in effect the same entity, thereby permitting creditors to seize assets to pay down debt.

This latest asset freeze comes at a critical time for Argentina, which is in the midst of a debt swap launched May 3 to tender some $18 billion worth of debt left over from a 2005 restructuring following Argentina’s historic 2001 sovereign debt default. The Argentine government claims it has received at least a 45 percent participation rate, with $8.5 billion worth of debt tendered so far. Argentina still needs about a 60 percent participation rate if courts around the world are to forcibly settle existing legal disputes and allow Argentina to regain access to foreign credit markets.

While many of the large investors with holdouts of more than $100 million in debt have already opted to buy discounted securities that mature in 2033 in the first phase of the current debt swap, there are still a number of smaller U.S., Italian and German retail bondholders debating whether to engage in this exchange or hold out for a potentially better offering. After all, the alternative to a debt restructuring for many of these smaller bondholders is through legal channels like Griesa’s court and perhaps other countries that could follow the U.S. court’s precedent to recover their investment through asset freezes. Now that the first phase of the debt exchange has passed, any investor who chooses to sign up for the swap from now until June 7 also has to pay a penalty of $1 for every $100 tendered, according to the debt swap rules. This penalty rule is further undermining bondholders’ incentive to take part in the restructuring, especially since many of the retail bondholders are complaining that they were unable to sign up for the swap in the first phase of the exchange due to confusion and technicalities related to the swap itself.

In order for the remaining holdouts to bite the bullet and sign up for this swap, they would have to be reasonably convinced that the Argentine government will do whatever it takes to obtain the funds — including “borrowing” the central bank’s foreign exchange reserves — to service the debt and avoid another default. Yet the Argentine government has already been battling opposition political forces in its attempts to transfer some of the central bank’s reserves into a government fund to repay private and multilateral creditors, and seizures of Argentine central bank funds by U.S. judges are likely to further undermine the swap’s attractiveness as the June 7 deadline nears.

Adding to the Argentine government’s concerns is the economic malaise spreading through Europe over the Greek financial crisis, which is dealing a blow to the euro and thus undermining the value of the government’s offer to European creditors. The Argentine government is already offering an unattractive 33 cents on the dollar in swaps tendered in euro, yen and dollar. Though the Argentine government claims that this asset freeze will in no way impact the ongoing debt exchange, there is little hiding the fact that a number of bondholders are still looking for ways to increase pressure on the government to either come up with more funds or offer better terms in tendering their bonds. The U.S. court will likely hear an appeal from the Argentine government before it makes a final call on the seizure and redistribution of Argentina’s Banco de la Nacion assets.

https://www.stratfor.com/analysis/20100525_argentina_debt_swap_stumble

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