INTERNATIONAL
ECONOMY
No. 180, June 16, 2004
Argentina:
Debt Restructuring Process
During 2001 the Argentine banking system was devastated by the economic
crisis. That period was characterized by Government policies that seriously
undermined the Rule of Law and were aimed at freezing bank deposits, frequent
restriction of the use of assets through judicial rulings, and growing noncompliance with loan payments.
One of the measures implemented by the Argentine government was
recognition of the debt and constant negotiations with international organizations.
The IMF is starting its third review of the three-year standby agreement (subject
to conditions), where the Argentine government’s proposal on restructuring the
overdue debt from December 2001 of 94 billion dollars will be analyzed and
promoted.
The amount of the debt to international organizations that Argentina has been
paying laboriously, mostly with the resources provided by international
organizations, is US$ 31 billion. The second Argentine offer to restructure the
overdue debt, modifying the offer made in Dubai (See Table No. 1) in September
2003, reduces the real discount creditors will suffer by recognizing interest that
has not been paid since December 2001; it also adds an annual cash premium
that will depend on growth in GDP.
The purpose of the new proposal is to reduce the debt from a level of
134% of GDP to 78% of GDP in 2005. Terms will be reduced to accomplish this,
coupons will be increased, and the haircut on the discounted bond will be
reduced.
1. Restructuring Proposal
Argentina presented a “definitive” offer to resolve the large moratorium of the
81.2 billion dollar debt. This proposal implies modest flexibilization of the terms
mentioned in Dubai and limited information on the proposal itself.
The proposal consists of:

Recognizing accrued and unpaid interest, in an amount subject to the
percentage of acceptance.


1.1
The nominal discount on capital stock will be 75%1, as presented in the Dubai
proposal. Thus, the capital will be reduced by US$ 60.9 billion.
The creditors’ premium is tied to growth in GDP, which is attractive for the
country.
Interest
As mentioned before, the accrued and unpaid interest is recognized,
subject to the percentage of acceptance:
If acceptance of the proposal is less than 70%, accrued and unpaid
interest at December 31, 2003, which is US$ 18.2 billion, is recognized.
To encourage the creditors’ support, if acceptance of the proposal is over
70%, the accrued and unpaid interest at June 30, 2004 is recognized, when it
would reach US$ 22.9 billion.
1.2
Debt
The debt to be restructured increased from the 81.2 billion dollars in bonds
announced in Dubai to 99.4 billion if acceptance of the proposal is less than 70%
of the creditors, or to 104.1 billion if it is equal to, or higher than, that percentage
(See Table No. 2).
Maturity of Restructured Debt
The maturities and interest structure proposed by the Government
enables it to enjoy 10 years of lower payments, which then increase significantly
as of 2014, rising sharply between 2024-2034. (See Graph No. 1).
In the first few years total maturities of the new debt will be slightly over
US$ 1 billion. During the first 10 years, only interest will be paid on the Par Bonds
and Discount Bonds at relatively low rates given the step-up structure of the par
bond and the capitalization of part of the interest on the discount bond.
From 2015 until 2024, total maturities of the new debt will be about US$ 4
billion per year. During that period amortization of capital will not have started
yet; the rates of discount bonds will be at their maximum; the rate of the Par bond
will continue to rise, and interest will start to be paid on the Quasi-Par bond.
1
The nominal discount on capital stock will be 75%, which is ambiguous because it is not known precisely
whether the discount is made on the nominal value of the debt or the present value of the debt; the
government has inclined toward the latter.
In 2025-2034 debt maturities will reach their maximum with annual
payments of US$ 6.5 billion on the average, since in 2025 amortization of capital
of the Discount bond will start, and in 2030 amortization of the par bond will start.
From the year 2035 on maturities will drop again to around US$ 3 billion,
except for 2037-2039 when they coincide with the end of the amortization of the
Par bond and the beginning of the amortization of the Quasi-Par bond.
1.3
Bonds to be Issued.
The three kinds of bonds to be issued in replacement of the old debt are
the same as the ones announced in Dubai: Par, without discount on the nominal
value; Quasi-Par, with an approximate cut of 30%; and Discount, with a more
important haircut.
*Par Bond: No nominal discount. 35-year term with a 25-year grace
period for capital repayment, with a step-up coupon that goes from 1.35% in the
first 5 years to 2.50% in years 6 to 15, 3.75% from years 16 to 25, and 5.25%
until maturity.
“Quasi-Par Bond2: for an amount of 8.3 billion dollars, at 42 years, with a
32-year grace period. The coupon, with an annual rate of 5.57%, will be
capitalized during the first ten years, and it will start to be paid as of the eleventh
year.
“Discount Bond: for 20.2 billion dollars, at 30 years, with a 20-year grace
period. Interest is 3.97% from year 1 to 5, and it increases to 8.21% as of year 11
(See Summary Tables Page 5 and 6)
1.4 Macroeconomic Assumptions
The plan is considered sustainable in the long term if two fundamental
assumptions are met:
1. That the country grows at least 3% per year.
2. That until 2010 the national State shall have a primary fiscal surplus of
2.7% of GDP – the amount committed to the IMF for 2004 is 2.4% - for payment
of its debt, both the restructured debt and the debt issued after default. The
surplus gradually descends until reaching the minimum of 2% in 2017.
Argentina emphasized the “sustainability” of the offer whose objective is
“not to repeat the permanent process of debt increase it experienced in the 90s.”
2
The Quasi-Par bonds will be changed into pesos at $1.40 per dollar plus the reference stabilization
coefficient (CER), and they will continue to be updated by prices by the CER.
1.5
Creditors’ Premium
The basis for calculating this premium will be real growth of 3.9% in 2005
and 3% from then on. If growth exceeds these expectations, a cash payment
equivalent to 5% of the difference between observed GDP and projected GDP,
both measured in current Pesos, will be recognized for bondholders.
As specified by Government sources, the premium shall be paid in cash in
pesos in the months of October following the year of occurrence (the first would
be paid in October 2006, provided growth of real GDP in 2005 is higher than
estimated).
1.6
Financing Sources
Domestic Financing sources are:

Refinancing of 65% to 75% of total maturities of domestic debt.

Fifty percent of the Income flow received by AFJPs (Retirement and Pension
Funds).

Collection of the Nation’s financial Assets from provinces and Banks.

External financing sources:

World Bank and IDB will be paid interest and capital will be refinanced.

IMF: constant exposure is assumed until 2014 which will then be reduced by
50% in the following years.
II. Main Weaknesses of the New Proposal

Growth in product of about 3% for more than 40 years is an ambitious goal,
considering the average growth rate of GDP in Argentina was barely 1.7%
between 1970-2003 (See Graph No. 2).

Creditors probably will not give significant value to the premium when
deciding whether to participate in the redemption.

This is mainly due to the fact the premium is tied to growth of the economy or,
more specifically, to an eventual occurrence. On the other hand, a real
exchange rate should be assumed to measure the premium in dollars,
because payments are made in current pesos, and discount rates should be
assumed that creditors will use to estimate the present value, with valuation
of the premium according to different scenarios.

According to Government estimates, the proposal represents a 75% haircut in
terms of Present value, but the rate used to discount was not indicated.

Thus far the modified proposal of Dubai has not been approved by the
creditors, because they think it is: complex, insufficient, and lacks information.
Conclusions
 The restructuring proposal implies a certain flexibilization of the terms
mentioned in Dubai. Accrued and unpaid interest is recognized in an
amount subject to the percentage of acceptance.
 Longer bonds with higher interest would be harmed the least.
 It is very important that bonds deriving from the restructuring be ruled
by foreign law.
 Debt restructuring makes it possible to avoid using foreign financing in
the first few years, since the surplus accumulated during the first 10
years would make it possible to reach 2005 with US$ 5.8 million. On
the contrary, as of 2014, maturities will exceed financing sources
significantly, and the amount of accumulated surplus will become
negative so it will be necessary to turn to the markets to finance the
gap. The possibility of having excess financing during the first postrestructuring years would give the Government some flexibility in
upcoming negotiations.
4. Economic Activity
The effect of the recovery in Argentina will continue to be felt strongly
during most of the first half of 2004. However, the speed of growth is expected to
drop in the second part of the year as the degree of available idle capacity starts
to decrease. Despite this, towards the end of 2004, similar growth to the average
for the region will continue.
Thus, in the context of the year, there will be a recovery in internal
spending, especially in investment resulting from a recovery in construction and,
to a lesser degree, from private consumption. That will undoubtedly have an
effect on imports of goods and services that will continue with the recovery
started in the second half of last year, reaching a similar level to 2001.
SUMMARY TABLE
Type of Bond
Par
Quasi-Par
Discount
Total
Nominal Value if
acceptance < 70%
US$ 10 billion
US$ 8.3 billion
US$ 20.2 billion
US$ 38.5 billion
Nominal Value if
acceptance > 70%
US$ 15 billion
US$ 8.3 billion
US$ 19.9 billion
US$ 43.2 billion
Source: Argentine Ministry of Economy and Production (MECON)
SUMMARY TABLE
Bond characteristics
Par
Term
Rates
Dubai
Improved Proposal
20-42 years
0.5-1.5%
Amortization
Not mentioned
Haircut on Nominal Value
Issue
Quasi-Par
Term
Rates
0%
35 years
Step-up: 1.35% until year
5; 2.5% for years 6-15;
5.25% from year 16-35
In the last 10 years, 25year grace period
0%
US$ 10 – 15 billion
20-42 years
1-2% fixed coupon
Amortization
Not mentioned
Haircut on Nominal Value
30%
Discount
Term
Rates
8-32 years
Growing coupon of 1-5%
Amortization
Not mentioned
Haircut on Nominal Value
75%
Source: Capital Markets Argentina
42 years
Average annual coupon
5.57% with capitalization
in the first 10 years
In the last 10 years, 32year grace period.
Capital is adjusted by
CER
Not specified, but we
understand acceptance
of change into local
currency (peso) would
imply a reduction in the
stock of the debt by
approximately 30%
compared to NV in US$
35 years
Step-up: 1.35% until year
5, 2.5% for years 6-15,
5.25% from year 16 to 35
In the last 10 years, 20year grace period
A “strong haircut” was
mentioned, but no
numbers were given
Table No. 1
Estimate of public debt stock announced
by Argentine government in Dubai (9/22/2003)
(Estimate not valid. Presented for information purposes)
Millions of US$
% of total
DEBT TO BE RESTRUCTURED
Eligible debt (Bonds)
Official Organizations
Commercial Banks
Other Creditors
Total
NON-DEFAULT DEBT
International Organizations
BODENs*
Guaranteed Nat’l. Loans*
Guaranteed Provincial Loan*
Bonds (exceptions)*
Others*
Total
TOTAL
(*) Issues resulting from collapse of Convertibility (December 2001) and
obligations prior to that date
Source: Argentine Ministry of Economy and Production (MECON)
Graph No. 1
Maturities of Restructured Debt
(In US$ millions)
Interest
Source: MVA – Macroeconomy
ARGENTINA
Real change in GDP%
Gross National Saving
(% GDP)
Gross
domestic
investment (% GDP)
Percentage change in
employment
Source: IFF
Debt
Graph No. 2
GDP Evolution
Years
GDP
Graph No. 3
Value of Trade Balance
(US$ Millions of Dollars)
Value of Trade Balance
Source: National Institute of Statistics and Census (Indec) and Financial
Sphere
Table No. 2
Estimate of public debt stock at December 2003
(billions of dollars)
DEBT TO BE RESTRUCTURED
Amount of GDP (1)
capital
(Interest)
(Residual
value and
capital
arrears)
Total
%
Eligible Debt (bonds)*
Bilateral
Commercial Banks
Other creditors
Subtotal
EXCLUDED DEBT
Guaranteed national loans
Guaranteed provincial bond
BODENs
International Organizations
Others
Subtotal
TOTAL
Source: Ministry of Economy: “Meeting of Consulting Work Groups,” October
2003.
Disseminated on www.mecon.gov.ar on October 28, 2003. This estimate replace
the one announced in Dubai on September 22, 2003.
(*) The difference from US$ 87 billion (Dubai) is due to capitalized and accrued
interest (note from Ministry of Economy).
(1) The government offer announced on June 1, 2004 includes this interest in the
amount to be restructured. Interest at June 30, 2004 adds up to US$ 22.9 billion.
Graph No. 4
Public Spending of National Government
(Percentage of GDP)
Total Spending
Source: Ministry of Economy and Production