Felix Salmon

I spent a large chunk of this afternoon at a fascinating discussion about Argentina, keyed off a paper from veteran Latam economist Arturo Porzecanski, entitled “Should Argentina be Welcomed Back?”

Arturo does a good job of explaining why Argentine debt looks attractive right now: the surging exports and international reserves, the rising incomes, the falling unemployment rate, the shrinking debt ratios. This chart, for instance, includes debt on which Argentina is still in arrears, to bondholders and the Paris Club:

He then explains in great detail why none of this really matters. Argentina might have the ability to pay its debts, but it doesn’t have the willingness to do so. It has been lying about domestic inflation for years, and refuses even to tell the IMF what its financial situation is. Arturo’s own personal estimate is that it’s running at roughly 30% a year — a far cry from the official numbers, which are in single digits. As Arturo notes, ” in the IMF’s leading publication, the World Economic Outlook, Argentina is the only country in the world whose inflation and GDP statistics are accompanied by a footnote explaining that the numbers cited have been challenged by private analysts”. He continues:

High-inflation countries are usually characterized by imprudent fiscal and monetary policies, feature unsustainable exchange rates, and tend to engender social and political unrest – sooner or later.

So far, the leftist government has managed to avoid that unrest — largely, says Arturo, by paying off the unions. But government spending is now out of control: it quadrupled, in nominal terms, between 2002 and 2009, and there’s literally no accounting for where it has all gone — because of the number of aggressive holdout creditors looking to attach Argentine assets, a lot of money transfers are very secret, and often in cash.

And the government is so blasé about paying its debts that it’s in arrears not only to old bondholders but also to fellow sovereigns in the Paris Club, as well as refusing to pay current and future judgments against it from the World Bank’s ICSID — judgments which carry the status of treaty obligations. If and when the Paris Club debt is ever resolved, says Arturo, that could well harm anybody buying the long-rumored new Argentine bond, since the Paris Club is likely to require that unrestructured private-sector creditors also do some kind of restructuring themselves, under its principle of comparability of treatment.

Arturo concludes that “the government’s attitude toward official and private creditors, as well as toward court judgments and arbitral awards, remains one of contempt”, and that as a result it should not “be welcomed back by the international capital markets”.

The problem with this is that it’s a fundamentally moralistic argument: Argentina, with its corruption and contempt for international institutions like FATF, doesn’t deserve to be a part of the international capital markets. But of course markets have few moral scruples, and indeed all of these problems with Argentina’s institutions only serve to increase the upside for people buying the country’s debt, should the Argentines get their collective act together under some future government.

“For us, the medium to long-term prospects for Argentina are extraordinarily good,” said Greylock’s Hans Humes in response to Porzecanski. Argentina’s corporate sector has somehow managed to survive and even thrive despite a complete lack of credit; just imagine what they could do once an Argentine yield curve emerges and they can start borrowing money again. Already, Argentine companies are going public, with most of the shares sold internationally: there’s clearly both demand for capital and global investors willing to supply it.

What’s more, I’m not convinced that the Paris Club would force Argentina to restructure a brand-new bond just out of fealty to a principle which has always had a certain amount of flexibility built in to it.

That said, I’m also not convinced that Argentina really needs to issue a global bond. The legal fees would be stratospheric, given the attempts that holdout creditors will certainly make to attach the proceeds. And Argentina already has lots of access to international investors who are more than happy to invest in its local bonds. Yes, many of Argentina’s corporates would love the sovereign to have an international yield curve in dollars, and they could probably issue longer-dated dollar debt internationally than they can domestically. But these things are all marginal, they’re not necessary.

The fact is that the distinction between foreign and local debt is rapidly becoming one that very few people care about any more, and Argentina had demonstrated that it’s perfectly willing to wait as long as it takes — which means as long as it takes to come to some kind of settlement with its holdout creditors — before braving the international capital markets. If the country’s bankers and lawyers can persuade the government that they have a workable solution before then, the country will probably go for it. But there’s no urgency. And I, for one, am not holding my breath.

Observers like Arturo might not like it if Argentina returns, but there are always slightly smelly debtors out there, and Argentina certainly isn’t as smelly as Venezuela. The fact is that the timing of Argentina’s return will be determined by boring legal concerns, not by highfaluting questions about how robust its institutions are.

After all the excitement yesterday, precipitated by a WSJ report, sell-side analysts have been pouring a bit of cold water on the idea that Argentina is about to reopen its 2005 debt exchange.

Certainly the markets don’t seem to think that something along the lines sketched by the WSJ is going to happen: the country’s defaulted debt is trading at about 29 cents on the dollar, while that kind of deal — complete with past-due interest and GDP warrants — would be valued at more like 45 cents (according to Barclays) or even 52 cents (according to Merrill Lynch).

The Barclays note, especially, is interesting, since Barclays is the main bank working on the deal. And this is what they have to say:

Our final assessment is that the ideas vented by the WSJ are unlikely to be the final proposal made to bondholders and that the process has a long way to go before the decision-makers give a go ahead to a specific proposal that can be seriously evaluated.

A generous deal might be more likely to get 75% take-up among the holdouts: that seems to be the critical mass needed for the markets to consider the old debt to have been restructured. But given that it’s still Nestor (rather than Cristina) Kirchner who is reportedly driving these things, and given that he’s very focused on domestic issues right now, it might well take a while to get there.

When Argentina did its very creditor-unfriendly debt swap in 2005, a large number of bondholders held on to their defaulted paper rather than let the country buy it back for a pittance. The holdout strategy had after all paid enormous dividends in countries such as Peru, Brazil, Ecuador, and Uruguay. The stakes were much bigger in Argentina, of course, but a large number of aggressive creditors had no intention of letting Argentina off cheaply.

Their strategy didn’t work, and since the Argentine default “holdout” creditors, as they’re known, have received very short shrift in other countries too, like Ecuador and Liberia. And now it seems that they’re more than willing to capitulate in Argentina, tendering their bonds in a deal that’s worse than the original offer, plus offering to lend $1 billion in new money.

The new deal has been put together by Barclays (f/k/a Lehman), which reportedly has found bondholders with $8 billion (face) of debt who are more than willing to pay all of Barclays’ fees and take pretty much exactly the same offer which they rejected in 2005. If the deal goes through, there will still be many billions of dollars’ worth of holdouts, but most of them will probably be judgment creditors rather than bondholders, which means that they’re basically ruling themselves out of any bond-swap exit.

The defaulted debt is trading in the high 20s right now; if and when this deal happens, it could go even higher. That’s because according to market rumor, the deal as it’s currently structured will have quite a tasty GDP warrant sweetener.

Of course, anybody who tendered into the original exchange, in 2005, got GDP warrants too, it’s true. But no one valued them at much more than zero at the time. It was only over the subsequent years of explosive growth in Argentina that the warrants started becoming extremely valuable to bondholders. This deal is existing bondholders’ chance to get in on that lucrative GDP-warrant action. And better yet, the Argentines even seem willing to give the holdouts all the old payouts on the GDP warrants, in the form of some kind of security — depending on the secondary-market value of those securities, that could be worth a lot of money. Argentina even is considering, or so I’m told, paying past-due interest on its repudiated Discount bonds all the way back to 2003, again in the form of new bonds.

What’s in it for Argentina? Well, for one thing, it gets $1 billion of new money from the bondholders represented by Barclays. But much more importantly, this deal, if it really does get up to somewhere in the $8-10 billion range, might well be enough to reopen conversations with the IMF, which is currently refusing to have anything to do with this deadbeat creditor.

Argentina’s running out of money, and although I’m sure a lot of investment banks might be willing to try and underwrite a new bond deal if this exchange goes well, I doubt there’s that much appetite out there for new Argentine global bonds, especially now they’re yielding less than they have done in years. The IMF I think would love to find an excuse to start working closely again with Argentina — which is, after all, a fully-fledged member of the G20. And in turn Argentina would love to have access to IMF liquidity. If it needs to do some kind of bond swap in order to make that happen, then so be it.

(more…)

In advance of the G20 meeting, the Independent’s Johann Hari resuscitated the “evil vulture fund” meme, concentrating especially (and extremely selectively) on the deal between Zambia and Michael Sheehan.

Hari is late to this story: I gave a very full version of it on my blog back in February 2007, and everything I wrote back then is still germane today. But Sheehan has replied to Hari, and his letter’s worth reading, so I’ve put it after the jump.

Interestingly, the G20 meeting this year might well coincide with some kind of announcement from the Argentines that they are reopening their old debt-exchange deal from 2005. One of the sticking points with any deal is that Argentina’s finance minister, Amado Boudou, has said that he doesn’t want to do any deals with “vultures” who are litigating against Argentina in New York. He probably needn’t worry: they’re probably not the kind of investors likely to tender into any deal in any event. But the heated rhetoric surrounding this issue is clearly helping no one. Which is why it’s sad to see contentious columns like Hari’s.

In any case, here’s Sheehan’s letter:

(more…)

I just got a rather hilarious phone call from Brand Democracy (specialists in “psychographic segmentation studies”), a UK company interviewing “CEOs, businessmen, and key opinion formers” on the subject of their opinion of Argentina; their client is the Argentine secretariat of tourism. It’s a slow news day, so I played along; Unicef got a donation at the end. And what fascinated me most was that after a couple of pro-forma questions about visiting Argentina at the beginning, the bulk of the interview was all about my opinion of doing business in Argentina.

How easy, on a scale from one to 10, did I think it was to do business in Argentina? Would it change my mind if we told you that Amnesty International says that Argentina has a better human rights record than the US? Or if we told you that Buenos Aires has only one-tenth the homicide rate of Rio de Janeiro? How attractive do I think Argentina is now, as a place to do business? What if we told you that it’s the eighth-biggest land mass in the world, just after India, and its economy has been growing fast since it defaulted in 2001? Now how attractive do I think Argentina is as a place to do business?

I fear the Argentine secretariat of tourism won’t be too happy with my answers: the country bumped along at a 3/10 no matter how many times they asked the question, and when they asked for the single best reason to do business in Argentina, I couldn’t think of one. But I am fascinated that the tourism ministry, of all people, has given Brand Democracy the mandate (and the money) to do this survey.

Why should that be the case? The best reason that I can come up with is that Argentina thinks it needs some a serious boost to its touristic infrastructure, and is looking for external investment on that front. It is after all a gorgeous country with great wine country and a beautiful and sophisticated capital city; it’s also the main port of exit for anybody going to Antarctica. So it should by rights get more tourist traffic than it does. Maybe this is all part of an attempt to get the big international tourism-industry companies to start investing much more heavily in Argentina.

Of course, there are other reasons why the tourism minister might award a large contract to a foreign media company. But those aren’t the kind of reasons which make doing business in Argentina any more attractive.