Argentine muscle won't win all fights / Business / Americas - Argentine muscle won't win all fights

Argentine muscle won't win all fights
>By John Dizard
>Published: February 7 2005 02:00 | Last updated: February 7 2005 02:00

Those who believe the Argentine government will succeed in enforcing its current exchange offer for the country's $87bn in sovereign debt are explicitly assuming the holdout creditors won't be able to enforce their claims through asset or cash flow seizures.

That may be. It is certainly the reasoning behind Standard & Poor's willingness to raise Argentina's foreign debt to a less than exalted B-minus rating after the conclusion of the exchange, sometime in April.

"We believe there is a better than even chance that the holdouts will not be able to interfere with debt service," says Jane Eddy, of S&P's sovereign research unit.

The Bank of New York, known for its narrow-minded approach to risk, apparently didn't feel like taking that better than even chance. It seems it insisted on indemnification guarantees from European banks before agreeing to be Argentina's agent.

The dissident holders of Argentine bonds were furious with S&P's announcement. Hans Humes, of the Global Committee of Argentina Bondholders, says: "Standard & Poor's didn't speak with any of us, or our lawyers, before issuing this statement." Mr Humes and other creditors with cases in the Federal District Court in New York believe they will indeed be able to grab enough assets, or transient cash flows, to bring Argentina back to the negotiating table.

These are the two positions: either Argentina is judgment-proof and will carefully adjust its Ascot and snigger at creditors from its comfortable seat at a Buenos Aires sidewalk cafe, or it will be hurled into a succession of international debtors' prisons, its fine 1990s tailoring shredded like the rake's in a Hogarth cartoon. We will see which is correct in the end.

In the meantime, holders of the Argentine government's paper have been sitting on dead money for two years, with the price bobbing from the high 20 cents in the dollar to the low 30 cents.

There has, however, been a huge amount of money to be made in Argentine debt - just not in the government's paper. The play in Argentina has been in electric utilities' paper. There is more than $4bn of it outstanding. According to JP Morgan, that paper showed returns of more than 70 per cent in 2003 and 28 per cent in 2004. "There is not much higher for it to go," says one distressed debt analyst.

At the time of Argentina's devaluation and default in 2001, the government forced the utilities to eat the difference between frozen utility rates and debt service on their dollar paper. It couldn't be done, and the loans and bonds plunged in value.

The smart money bought. To begin with, the utilities quickly got current on their payments to suppliers. Otherwise, no spare parts from the likes of Siemens or General Electric.

In the three years since the devaluation and default, Argentina, shorn of debt service requirements and in possession of much new physical capital, has rebounded. It has recently been running a gross domestic product growth rate of between 4 and 5 per cent. That growth is about to run into a wall as the country bumps up against the limits of its electrical plant. "The first problem is that there has not been enough transmission investment," says a Buenos Aires utilities analyst who works for one of the ratings agencies. "That will hit within a year. Then, no later than 2007, the country will run into a shortage of generating capacity."

Oddly, the Argentine government has not addressed the shortage. However, transmission investments are a fraction of the cost of building new generation. For that, they have a plan, announced in December. It is just not a finished plan.

The government plans to allow generators gradually to move to full market pricing of their power by late 2006. In return, generators will chip in much of the money owed to them up to that point by the national grid manager, about $350m, to fund construction of two gas-fired generating plants. These, the government assumes, can be built by 2007.

Generating plants will cost another $500m or so, and over two years, to construct. Even financing from suppliers won't come through until the restructuring plan is agreed, which may happen by the end of this year. "It would be reasonable to assume these plants won't be ready until at least 2008," says an Argentine utility source.

The government's plan of extorting utility receivables is one of those deals that work once. Economic growth has about a one to one relationship with electricity use. Without making capital markets happy the Argentine government will find itself with two years at most until growth halts. Aggressive lawyering and stirring rhetoric won't work at that point.

The Argentine utilities will be in an increasingly strong position, which is reflected in their debt prices. As for the government, I think if they win this round, they lose the next one.


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