Argentina Prepares to Shed Its Debt, Reenter Fiscal Markets

Argentina is expected to complete the largest debt restructuring in history today, hoping to end the long saga of financial excess, collapse and default that has made the country’s name synonymous with fiscal irresponsibility.

Today is the deadline for President Nestor Kirchner’s take-it-or-leave-it offer to worldwide investors who own the nearly $103 billion in bonds and interest that Argentina defaulted on three years ago: Accept payment in a new series of bonds that will, on average, pay back investors one-third the value. Most are expected to take it, but some have already filed lawsuits.

“There will be no other offer,” Kirchner told investors this week. “I tell you this with all kindness, with pain in my heart. But we’ve had to come and fix the debt other people created.”

Kirchner took office less than two years after interim President Adolfo Rodriguez Saa declared a moratorium on debt payments on Dec. 23, 2001 -- to rapturous applause from Argentina’s Congress. Since then, Argentina has not paid a dime on the debt.

Argentina will issue new bonds to replace the $102.6 billion in defaulted bonds and interest.

Despite the seemingly bad terms of Kirchner’s offer, financial observers say about 75% of the bondholders are expected to accept. Officials at the International Monetary Fund and other agencies have said that would probably end Argentina’s status as a financial pariah.

The debt restructuring will allow the nation to regain access to world financial markets.

The Bank of New York is the global exchange agent for the debt swap, a massive series of transactions described in financial circles with superlatives.

It is the most complex ever because the bonds were issued under the laws of eight countries and in 14 currencies. The debt swap, in dollar value, is also the worst loss on investment offered to holders of sovereign bonds in recent times.

“It’s been the large size of the debt that has given Argentina more room to maneuver” during the three-year standoff, Carola Sandy, an analyst at Credit Suisse First Boston in New York, said by telephone.

With Argentina’s official poverty rate hovering around 50% of the population and the economy only beginning to recover after years of recession, Kirchner’s government has argued the country cannot pay more.

“The government kept insisting that this offer was its last and only one,” Sandy said. “Investors now believe them.”

On Feb. 9, Argentina’s Congress passed a law banning the government from making any new offers to the bondholders.

Argentina defaulted on 152 different bonds issued throughout the 1990s and up to 2001. Some had double-digit interest rates. By 2000, the rates and risk associated with Argentine bonds were so high they were, in essence, junk bonds.

“I’ve learned that you can’t invest in a country based only on what you see in the brochures,” German investor Stefan Engelsberger told an Argentine newspaper during a recent visit. He had come to see how the country had spent his $33,000 in defaulted bonds.

“If I had known about all the political rivalries in Argentina, I wouldn’t have bought the bonds,” he said. “It’s a mistake a lot of people made.”

Argentina’s debt grew, for the most part, during the 1990s. President Carlos Menem and his chief rival, Gov. Eduardo Duhalde, spent millions in public works projects tainted with corruption allegations. Billions more were spent shoring up the Argentine peso, whose value had been linked to the dollar.

The inflated value of the peso helped maintain an illusion of prosperity long after the economic boom had gone bust.

When the house of cards collapsed, the tremors were felt as far away as Italy, where thousands of small investors had purchased the bonds.

On Italian TV last month, Argentine Finance Secretary Guillermo Nielsen was asked if his country had deliberately targeted small investors in Italy, where people traditionally prepare for retirement by putting their money in government bonds and living off the interest.

Nielsen denied the charge. He told Italian viewers, “On behalf of the Argentine government, and on behalf of all Argentines, I beg for forgiveness from those who are suffering because they invested in Argentine bonds.”

He visited three Italian cities as part of an around-the-world “road show” to persuade the bondholders to accept the offer. The two-week tour included stops in Miami, Zurich, Tokyo, New York and London.

Bondholders in the United States have filed dozens of lawsuits against the Argentine government, with one plaintiff winning a $725-million judgment, which is under appeal.

In Argentina, the default and the economic collapse that precipitated it have left behind a shaken country. At the height of the crisis, official unemployment surpassed 20%. When the government put restrictions on withdrawals to keep the financial system afloat, people stopped trusting banks altogether.

“We’ve been the victims of a great fraud perpetuated by the government and the big banks,” said Horacio Vazquez, who leads an association of Argentine bondholders in Buenos Aires. “And we cautious Argentines who invested in the public debt because we thought it was the safest thing to do have become the laughingstock.”

Vazquez, who has $50,000 in defaulted bonds, will not accept the swap offer. Instead, he plans to sue. But he realizes that few bondholders will take that route.

“Many people are so tired they can no longer wait,” he said.

A large chunk of Argentina’s defaulted debt is held by brokers who purchased the bonds from desperate investors for a fraction of their nominal worth.

Silvia Gallardon, 62, an unemployed legal assistant, recently sold her $80,000 in bonds for $24,000. The bonds were causing her too much stress, she said. “I went into a depression that lasted 20 days,” she said. “I had skin problems. My hair started to fall out.” Selling them “was like getting rid of a cancer.”

The offer closes today at 1:15 p.m. PST. Argentine officials say the final count of bondholders who accepted the government’s offer will be released next week.