[Mb-civic] An article for you from an Economist.com reader.

Fri Feb 25 12:29:49 PST 2005

- AN ARTICLE FOR YOU, FROM ECONOMIST.COM - 

Dear civic,

Michael Butler (michael at intrafi.com) wants you to see this article on Economist.com.

(Note: the sender's e-mail address above has not been verified.)

Subscribe to Economist.com now and save 25% by clicking here now
http://www.economist.com/subscriptions/offer.cfm?campaign=168-XLMT

SCREECHING TO THE PRECIPICE
Feb 25th 2005  

Argentina appears to have persuaded most of its bondholders to accept a
deeply discounted debt-restructuring offer. But the country's financing
problems will continue unless it can coax back capital stashed abroad
by its citizens

WHEN Argentina started restructuring its $81 billion-plus-interest in
defaulted debt last month, it was billed as the biggest game of chicken
in financial history: the government vowed not to improve its offer,
worth broadly 30 cents on the dollar, and bondholders promised never to
accept it. Now it seems that despite their threats of lawsuits, asset
seizures and collective rejection of the Argentine ultimatum, the
creditors swerved practically before they got into the car. 

Not so long ago, most analysts were predicting that at best 70% of
bondholders would accept the offer, which closes on Friday February
25th. By the day before, about half the outstanding debt had been
exchanged, retail investors were queuing to hand over more and some big
institutional investors planned to follow suit on the last day.
Strangely, a significant chunk of the bonds is changing hands prior to
being handed in. Retail investors, tired of the hassle, may be selling
to more sophisticated players who hope to take quick profits once
Argentina is re-admitted into the emerging-market bond index. Most now
reckon that at least 80% of creditors, whoever they may now be, will
participate. That looks high enough to persuade the International
Monetary Fund (IMF) to bless the deal and also to trigger "exit
consent" clauses in the bonds that could make them virtually illiquid
for those who choose not to take part. 

The success of the government's negotiating strategy--which was not to
negotiate at all but to offer a take-it-or-leave-it package instead--is
a political triumph for Argentina's president, Nestor Kirchner. As his
Peronist party heads into legislative elections in the autumn, he can
claim that he faced down the foreigners and won. 

The foreigners have been chasing their claims since Argentina's
government stopped servicing its debt more than three years ago, on
December 23rd 2001. It was the biggest sovereign default in history.
Despite liberal help from the IMF, the government could not meet the
punishing yields exacted by skittish investors or balance its books in
the midst of a protracted recession. It devalued the peso, then
decoupled it altogether from the dollar, dismantling the
"convertibility system" that had killed hyperinflation a decade before.
At its worst, the peso lost three-quarters of its value, wreaking havoc
on the finances of banks, companies and households, which could no
longer meet their dollar liabilities. But hyperinflation did not
return, and after the economic meltdown of 2002, Argentina's newly
competitive exchange rate helped it grow once again.

Standard & Poor's, a rating agency, has said that after the
restructuring it will rate Argentina a B-minus debtor, a status that
Ecuador did not attain for five years after its default. Foreigners
will probably not want to lend to the Argentine government directly for
a while after taking a 70% loss--twice the average haircut in recent
sovereign defaults--and the government will still be left with a public
debt equal to 80% or more of GDP. But the country's new credit rating
should increase access to capital for its best-behaved companies. Other
immediate benefits include a smaller chance that lawsuits against the
government will succeed and a better relationship with the IMF. The
Fund might allow Argentina more time to repay the $14 billion it owes
the IMF and soften the conditions that govern it. 

Most important, greater confidence in Argentina (and its soaring equity
markets) may bring home some of the $150 billion or so its citizens
hold abroad. The return of flight capital is a practical necessity for
the country to keep growing. Its galloping GDP growth, 8.8% in both
2003 and 2004, owes a lot to high soyabean prices and the use of
capacity left idle by the economic collapse in 2001-02. Commodity
prices have already declined from their peaks and capacity constraints
are likely to be felt again this year, so fresh capital will be needed.
Mr Kirchner has hardly wooed external direct investors: his government
is yet to lift the freeze imposed during the crisis on rates charged by
most foreign-owned utility firms. This has exacerbated worries that
contracts in Argentina are not worth the paper they are printed on. 

The president seems to be betting that a successful restructuring will
increase domestic investment from its current level of 17% of GDP to
more than 20%, enough to sustain impressive growth throughout the
economic cycle. Only time will tell if the Argentines cheering his
"patriotic" intransigence towards the international financial community
are willing and able to shoulder the burden themselves.

See this article with graphics and related items at http://www.economist.com/agenda/displaystory.cfm?story_id=3698253&fsrc=nwl

Go to http://www.economist.com for more global news, views and analysis from the Economist Group.

- ABOUT ECONOMIST.COM -

Economist.com is the online version of The Economist newspaper, an independent weekly international news and business publication offering clear reporting, commentary and analysis on world politics, business, finance, science & technology, culture, society and the arts. Economist.com also offers exclusive content online, including additional articles throughout the week in the Global Agenda section.

- SUBSCRIBE NOW AND SAVE 25% -

Click here: http://www.economist.com/subscriptions/offer.cfm?campaign=168-XLMT

Subscribe now with 25% off and receive full access to: 

* all the articles published in The Economist newspaper
* the online archive - allowing you to search and retrieve over 33,000 articles published in The Economist since 1997 
* The World in 2004 - The Economist's outlook on 2004 
* The US Election 2004 - providing dedicated coverage of the election, including articles from Roll Call, Capitol Hill's leading political publication 
* Business encyclopedia - allows you to find a definition and explanation for any business term 

- ABOUT THIS E-MAIL -

This e-mail was sent to you by the person at the e-mail address listed
above through a link found on Economist.com.  We will not send you any 
future messages as a result of your being the recipient of this e-mail.

- COPYRIGHT -

Economist.com privacy policy: http://www.economist.com/about/privacy.cfm