No Tears For Argentina

Investors in the government's defaulted bonds are furious about a swap offer

Nicola Modafferi feels betrayed. In 1998, the insurance salesman from Palmi, a town in southern Italy, followed the advice of his local bank and invested nearly $23,000 of his parents' money in high-yield Argentine government bonds. "They sold them to me saying there was no risk of losing any money," Modafferi recalls. Three years later Argentina defaulted on its debt. For Modafferi, 29, and countless other buyers of Argentine paper, it has been a waiting game ever since.

Now the wait may be over, but bondholders are anything but happy. The government of Argentine President Néstor Kirchner is offering a take-it-or-leave-it deal in which it will exchange $81.8 billion in defaulted government debt for up to $41.8 billion in new bonds with lower interest rates and longer maturities. "It is totally unacceptable," says Modafferi. "This is my father's money."

The government's attempts to force through a deal that at its worst will give bondholders 28 cents on the dollar has infuriated thousands of individual investors around the world, but particularly in Italy, where many of those who bought the Argentine paper were pensioners. So far, only 35% of all bondholders have signed up for the offer, which expires on Feb. 25, and only a tiny percentage of them are foreigners. Investors' complaints are falling on deaf ears, though. Argentine officials, who spent the last three weeks touring the world's financial capitals to drum up support for the swap, insist that those who hold out will not win better terms. "There will be no improvement," says Finance Secretary Guillermo Nielsen. "The message has been very clear," says Mohamed A. El-Erian, manager of the emerging-market bond fund at Pacific Investment Management Co. "Those who remain outside the swap will be holding orphan bonds."

The heated rhetoric reflects the high stakes. Under the current terms, bondholders stand to lose 57% to 72% of their original investment, depending on what type of paper they hold. By comparison, participants in earlier swaps in Russia and Ecuador took a hit of around 50%. "The Argentine proposal is completely untenable," says Hans Humes, co-chair of the Global Committee of Argentina Bondholders, which represents holders of about one-third of the debt.


Investors who refuse to accept Argentina's offer may seek redress through the U.S., Italian, or other foreign courts -- a drawn-out and expensive process that holds no guarantee of success. "You've got to factor in the time, the effort, the legal costs, and the expense of holding an illiquid asset," says Walter Molano, senior managing director at BCP Securities in Greenwich, Conn.

Despite their tough stand, there is still a chance the Argentines will back down. Economy Minister Roberto Lavagna says Argentina is looking for at least 50% of bondholders to accept the offer; any less, and the government will likely be forced to negotiate. One concern is that the International Monetary Fund may refuse to roll over the $15 billion Argentina owes the fund unless the swap wins widespread acceptance. And a high level of participation would help restore Argentina's battered credibility in the eyes of international investors. In one encouraging sign, Standard & Poor's on Feb. 2 assigned a B- rating to the bonds to be issued in the swap. Ecuador had to wait four years to regain its B- rating after it emerged from default in 2000.

"Despite the rhetoric from Buenos Aires, Argentines do not want to be stuck forever outside the international financial system," says Claudio Loser, a former official with the IMF and senior fellow at the Inter-American Dialogue, a think tank in Washington. But even if Argentina returns to the good graces of the world's financiers, it'll be no comfort to investors like Nicola Modafferi.

By Colin Barraclough in Buenos Aires

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