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Last Updated: Thursday, 13 January 2005, 21:55 GMT
Q&A: Argentine debt swap
Argentina's President Nestor Kirchner
President Kirchner desperately needs creditors to accept his offer
Three years ago, Argentina suffered a lengthy recession, which culminated in the government halting debt repayments to its private creditors.

The debt default sparked a deep and prolonged economic crisis and much human suffering in the country.

Following lengthy negotiations over Argentina's of its $103bn (55bn) debts, the country has offered to repay up to $42bn, though only if the investors accept a string of conditions.

The investors are under huge pressure to accept the offer, since anyone who says no could end up with nothing.

The bond holders must be furious about not being offered more of what they are owed?

Yes indeed. They have been fighting for three years to recover their money. When Argentina put forward its original offer to repay just a quarter of the total value of its debts, they almost universally declared they would turn it down and continue fighting.

That was during the autumn of 2004. Since then, Argentina's government has responded with a fresh offer, though in doing so it has also made matters more complex.

Creditors have been given three choices, each of them presented in the form of complex financial engineering solutions full of "ifs" and "buts", which make it difficult to ascertain whether or not they are in fact worth more than the original proposal.

So how does it work?

One solution, which is targeted at private investors, is to swap existing bonds for new ones with the same face value, so a creditor who is owed $50,000 will get $50,000 - but not until 2038.

Investors accepting this offer would have to endure 33 years of low interest rates starting at just 1.3%, gradually rising to 5.25%. The problem is that inflation would rapidly erode the cash pile, making it worth much less in real terms by the time it is due to be cashed in.

Besides, what if there's another crisis between now and then? Those afraid of this happening could sell the bond right away, but a 30-year low yielding bond from a high-risk issuer is unlikely to be worth much.

The other two offers would repay less than the total owed. One would repay two thirds, then yield 3.3% until maturity in 2045. The other would repay a third and yield 8.28% until maturity in 2033.

The repayment schedules are in some cases linked to Argentina's growth rate and in some cases the bonds are denominated in pesos only, thus introducing additional currency risk, and there are also several other conditions attached to the offers.

The creditors must be confused, so presumably it is not clear what they will do?

Chances are most of them will accept the offer, essentially because they realise they're drinking in last chance saloon.

Indeed, some have already said they will do so, in particular Argentina's pension funds, though both Argentine banks and insurance companies and some foreign firms are expected to take a similarly pragmatic approach.

Taken together, this could bring the acceptance level to between 50% and 70%, only just short of the 75% level the International Monetary Fund (IMF) insists should be set as a minimum before a deal is forced through.

But not all creditors are compliant. An organisation that claims to represent almost half the bond holders, the Global Committee of Argentina Bondholders (GCAB), has recommended investors to reject the offer that is on the table.

But if they do that, they won't get a cent, right?

It all depends. If only a minority of bond holders turn down the offer, then they might well be unable to recover anything at all. It seems only a united approach could force Argentina to continue negotiating and perhaps raise its offer.

But the creditors are based all over the world and they are thus unlikely to gather under one umbrella. Two fifths of the money is owed to institutions and individuals in Argentina, a tenth to US creditors, a few in Japan and the remaining third in Europe.

Is there anything else the creditors can do?

Well, there are always the courts. GCAB has warned of a torrent of law suits if Argentina refuses to come up with a better offer. Previous attempts to take a legal route have failed.

It seems unlikely to happen, but what if a majority of the creditors refuse to accept Argentina's offer?

Argentina desperately needs to solve this problem. Until it does, it cannot easily borrow money from private lenders and investors will continue to steer clear of the country due to the uncertainty.

Consequently, the country's economic recovery is unlikely to pick up speed.

In fact, this goes some way to explain why Argentine institutions are prepared to accept greater losses in order to help kick-start the economy at home.

But the frayed nerves of private investors hardly amount to the biggest problem Argentina is facing. The country is also trying to convince the International Monetary Fund to inject fresh cash into its ailing economy.

A failure to land a deal with its private creditors could derail the already paralysed negotiations for a new deal with the fund.

Let's instead focus on the best case scenario, from Argentina's point of view. The private creditors accept its offer and in one elegant swoop the country's debts are wiped out. Right?

Wrong. A deal would do a great deal of good, but given that the country's total debt burden currently stands at $180bn, its debts would still remain greater than $100bn.

That debt comes on top of what Argentina owes the IMF and the World Bank, so we are not talking about relieving the country from its liabilities.

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