Argentina crisis scares bond investors

The Samurai bond market has been hit

Argentina's declared intention not to make a scheduled $28m repayment on its $132bn debts soon after New Year is set to mark the biggest debt default yet.

The consequences are grave, not just for Argentina itself, which will have to pay a higher rate of interest on its loans in the future.

Lenders of large sums of money tend to hand over the cash to countries, large companies or institutions, in exchange for bonds which will offer them a fixed rate of return on their investment.

This is all well and good, as long as the fixed instalments are being paid.

But if a country or a company runs into difficulty and thus becomes unable to pay, the bonds become highly risky investments.

Samurai bonds

Among the casualties of the Argentine fall-out are Japan's Samurai bond market, in which non-Japanese entities issue yen-denominated bonds.

For the foreigners, borrowing money in Japan is relatively cheap since official interest rates in the country are 0%.

Japanese investors are keen to invest in bonds which offer a return greater than 0%.

Consequently, there has been a boom in Samurai bond issuance over the last two-and-a-half years.

But the market took a knock in the wake of 11 September.

"Investors are nervous about taking new risks," said Tokyo-Mitsubishi Securities chief credit analyst, Takuya Mishima.

"A worsening situation in Argentina has intensified such nervousness."

This means Japanese investors, although still keen to invest in financial instruments that offer a decent return, have become more cautious about whom they will lend money.

Slow return

Argentina's own ability to convince major private sector lenders to buy its bonds has become severely dented by its default.

Analysts believe it could take years before the market's confidence in Argentina recovers.

Russia, which has not issued new bonds since it defaulted on its Soviet Union debts in August 1998, is expected to return to the market in 2002 - a remarkably speedy move, analysts said.

"Russia recovered from its crisis politically and economically quite quickly. Argentina is a different case," said one analyst.

"In order for [Argentina] to come back to the market, you have first to restructure current debt."

Arnab Das, ead of emerging market research and strategy at Dresdner Kleinwort Wasserstein, said: "The Russian Federation did not default on the bonds that were the hardest to restructure.

"The Argentines have announced a formal default, implying the republic will not pay euro bonds."

This, Mr Das said, could make the restructuring process "more difficult or protracted than in the Russian case".