11/02 04:51

Argentina Plans to Default on $95 Billion of Bonds

By John Lyons and David Plumb and Andrew Barden

Buenos Aires, Nov. 2 (Bloomberg) -- Argentina plans to default on at least $95 billion of bonds, more than twice the amount Russia failed to honor in 1998, by swapping the debt for securities that pay lower interest rates.

Argentina's floating rate bond fell 14 percent to an offer price of 41.75, to yield 69 percent, a record, according to J.P. Morgan Securities Inc. It plunged more than 9 percent yesterday. Brazil's widely traded ``C'' bond fell 1.9 percent to 66.25 offered, according to J.P. Morgan prices.

President Fernando De la Rua said the government will cut $4 billion of interest payments next year through the exchange. Investors will receive new securities that pay average rates of about 7 percent, compared with 15 percent now, he said.

``You certainly wouldn't want to have your kid's school fund in Argentine bonds,'' said Cristiano Leao, a trader at IntesaBci SpA in London. ``I don't think there's any carrot in this swap.''

Argentina is paying for its failure to cut spending and a decade- long reliance on a fixed exchange rate, which made exports less competitive and limited its ability to cut interest rates in a recession, economists said. While De la Rua said the decision shows the government will lower interest costs, some rates surged on concern there will be a run on Argentine banks.

``We could see a big outflow of deposits and the crisis becoming accelerated, and not abated, by these measures,'' said Mohamed El Erian, who helps manage $7.5 billion at Newport Beach, California- based Pacific Investment Management. He has no Argentine debt in his Latin American debt holdings.

Peso Rates

One-day peso interest rates tripled to as high as 190 percent as banks braced for withdrawals. Bank deposits have fallen 11 percent since the end of June, or by $9.1 billion.

The government, which has about $4.6 billion of principal and interest payments due through the end of the year alone, will announce more details later. The price of the benchmark floating rate bond due 2005 is trading at about 48.75 cents on the dollar, suggesting the interest rate cut won't be the end of losses. The bond's yield has tripled since June to 54.5 percent.

``Everyone is trying to work out what the capital loss might be,'' said Jean-Dominique Butikofer, who manages 300 million euros ($272 million) of bonds at Julius Baer Asset Management in Zurich. ``There is so much confusion in the market, bonds may fall further.''

Second Time

The default marks the second time in little more than 10 years that Argentina has been unable to pay its debts. The country defaulted in the late 1980s, and in 1992 issued about $25 billion of so-called Brady bonds in exchange for debts accumulated in the late 1970s. Other countries that restructured defaulted debt, such as Mexico, cut spending and reduced their dependence on foreign capital in the years that followed.

Argentina raised about $89 billion on capital markets in the past 10 years, most through foreign bond sales, to help finance a widening budget deficit.

``The time has come to lower the cost of the debt,'' Economy Minister Domingo Cavallo told business executives and government officials at the state-owned Banco de la Nacion.

The default dwarfs that of Russia, which in August 1998 stopped paying on $40 billion of domestic bonds. Argentina, which has $132 billion of public debt, doesn't plan to restructure any multilateral loans, Finance Secretary Daniel Marx said.

``This is something new for the financial community in terms of order of magnitude,'' said Mauro Leos, an analyst at Moody's Investors Service. ``It is unique in every respect.''

Pension Cuts

De la Rua, in an address to the nation, said the government will cut pension contributions deducted from paychecks in half for one year to boost spending. It also plans to lower the sales tax for credit card purchases to help spark economic growth. The president reiterated that the country will keep the peso pegged one-to-one with the U.S. dollar.

The government said it doesn't expect new foreign loans.

Investors' expectations that Argentina would default already are reflected in the prices of many emerging market bonds.

``The question for investors now is whether the scant details we have seen will be enough for Standard & Poor's and others to put a default rating on Argentina,'' said Jurgen Odenius, global head of emerging markets strategy at Commerzbank Securities in London. ``There would be further market impact.''

Merrill

Argentina selected Merrill Lynch & Co. to advise on the planned exchange. Merrill Lynch International President Jacob Frenkel is in Buenos Aires holding talks with the government.

The government also has demanded that local banks and pension funds swap at least $14 billion in provincial and sovereign debt for securities that pay about a third of the interest.

S&P this week cut Argentina's credit rating three steps closer to default to ``CC,'' the lowest of any country. The company said any debt exchange that lowers the value of investors' holdings would be tantamount to a default. Moody's also rates Argentina the lowest of any country in the world and has raised concern about the government's debt exchange plans.

Government officials said they will offer investors one or more new bonds, which will pay either a fixed 7 percent interest rate or floating rate of 300 basis points over the London interbank offered rate, government officials said.

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Top%20Financial%20News&s1=blk&tp=ad_topright_topfin&refer=topsum&T=markets_bfgcgi_content99.ht&s2=blk&bt=ad_position1_topfin&middle=ad_frame2_topfin&s=AO_JsrRRJQXJnZW50

-- Martin Thompson (mthom1927@aol.com), November 02, 2001

Answers

What does Moody's mean, tantamount to a default? It is a default. Period. If the government is arbitrarily going tp pay investors less money on its debt than contracted for that is default with a capital D.

-- Wellesley (wellesley@freeport.net), November 02, 2001.

With the close trade relations between Brazil and Argentina, that's a real "look out." Our stock market has already discounted an Argentine default, but, with the relationship of a 1 to 1 (Argentine) dollar exchange rate, with a 1/2 to l (Brazil) dollar exchange rate (the Real is NOT pegged to the dollar), there could be tremendous fallout.

This means, simply, that Brazil could go down--hard--too.

And, I don't think Wall Street has discounted this possibility yet.

-- JackW (jpayne@webtv.net), November 02, 2001.