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Argentina's Debt Exchange Plan Gets Mixed Investor Reaction - 2001-11-09


Investor reaction to last week's plan by President Fernando de la Rua to avoid a default on Argentina's debt has been muted. Investors are unconvinced that the president's so-called voluntary debt swap is really all that voluntary.

Argentine President Fernando de la Rua faces an uphill battle in convincing investors to exchange $95 billion worth of old bonds for longer maturing papers that carry lower interest rates. The massive debt swap could save South America's second largest economy $4 billion in interest payments in 2002.

Argentina has been stuck in recession since mid-1998 and, without economic growth, the government is finding the country's $132 billion debt load nearly unbearable. A fifth of Argentina's annual budget goes to debt payments.

Mr. de la Rua and his economy minister, Domingo Cavallo, are trying to convince investors to trade in higher yielding bonds for lower yielding ones that are backed by guarantees. The government's reasoning is that it is better to accept a sure payment, albeit smaller, than stick with larger, more uncertain payments.

The government is insisting that the move is not a default, but rather, a "friendly, voluntary" debt exchange. Investors and international credit rating agencies are not so sure.

One local economist said investors were trapped between a rock and a hard place, given that, if investors don't accept the lower rates, there is no other option. A New York based economist said the debt swap was as friendly as having a gun pointed at your head.

Credit agencies Fitch and Standard & Poor's seemed to agree. On Tuesday both downgraded Argentina's long term debt rating to default.

If this sentiment picks up steam and the swap fails, Argentina would likely be forced into the biggest ever bond default by a developing country, surpassing Russia's 1998 collapse.

Mr. de la Rua and his economic team will get their first taste of investor willingness to take a loss when the government carries out the local part of the debt exchange on November 16. The international portion of the debt exchange most likely won't be ready until early next year, according to government officials.

On Thursday Finance Secretary Daniel Marx came to New York to lay the groundwork for the international debt exchange and ease investor concern over the nature of the swap. Mr. Cavallo, whose departure was delayed by the government's row with provincial governors over revenue sharing, will join him Friday.

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