Argentina yesterday asked creditors of the country's $94 billion defaulted foreign debt to take a 75 per cent cut in the value of its claims as a condition to end the moratorium declared in December 2001 and normalise payments.

Robert Lavagna
The government also demanded 100 per cent forgiveness of the interest since payments were suspended until the day an agreement is reached.

In a presentation to about 300 representatives of creditors, investments banks and journalists at Dubai International Convention Centre, Economy Minister Robert Lavagna and Finance secretary Guillermo Nielsen didn't advance details about maturities and other terms of the new bonds Argentina intends to offer in lieu of the non-performing debt.

"This will be part of the negotiation," Nielsen said.

Focal point

Lavagna said the 75 per cent "haircut" is "the focal point around which all the rest has to be built, without modifications".

They announced that the Buenos Aires government would act as its own global agent but plans to invite a dozen banks from Argentina and countries with the highest exposure to join a steering committee of creditors, with some of them acting as regional coordinators.

With more than 43 per cent of the bonds in default in the hands of individual investors in several countries, Nielsen acknowledged that the negotiation "will be one of the most complicated in history" and presents Argentina and its creditors with "problems of extreme complexity which we will have to solve together".

Lavagna suggested that the target of a three per cent fiscal primary surplus for 2004 that Argentina agreed in the three-year programme approved Saturday by the International Monetary Fund is "an average point of departure" that can be improved.

The main criteria behind the offer is "Argentina's capacity to pay," he said.

Lavagna added that terms of the new debt instruments – a discount bond, a par bond and a partially indexed capitalisation bond – will be set taking into consideration three main elements: Argentina's rate of economic growth, the rate of unemployment reduction and the rate of poverty reduction.


Initial reaction was mixed. "The announcement is not realistic and has to be further discussed," said Stefan Engelsberger, in a statement he distributed of behalf of the First German Society of Bondholders, at the end of the presentation.

"We acknowledge the efforts of the Argentine government to open a constructive dialogue, but we expect professional business talks with structures and efficient debates, and are firm in maintaining our legal claims and civil property rights," he said.

According to Nielsen, some 5.1 per cent of Argentina's sovereign bonds in default are held by German investors. Argentine investors have the largest share (38.4 per cent), followed by Italians (15.6 per cent), Swiss (10.3 per cent), Americans (9.1 per cent), and Germans (5.1 per cent) and Japanese (3.1 per cent).

Good news

Former Brazilian Central Bank president Fernao Bracher, who was in the audience, said that the offer was "at the low end of expectations and can only be improved".

Bracher, who negotiated with foreign creditors of Brazil in the 1980s and is now vice-chairman of Banco Itau (which is not a creditor of Argentina), said the proposal "is good news because it opens the way for a normalisation of the country's relations with its creditors."

Representatives of investment banks also tried to be positive. "Expectations were very low and I believe they met them," Jaime Valdivia, director of research at the New York firm Emerging Sovereign Group.

"At the end of six months of negotiations we will have a smaller haircut for creditors and a bigger primary fiscal surplus in Argentina," he said.

Key to the success and any deal is the fiscal primary surplus Argentina will produce in 2005 and 2006. Those numbers were not set in the IMF agreement.

According to the Fund's calculations, Argentina has to produce a fiscal surplus of 3.2 per cent in 2005 and 3.4 per cent in 2006 to continue to honour its obligations to multilateral institutions and creditors of its performing loans, which represent some 50 per cent of the country's total public debt.

Lucy Gallagher, head of Emerging Market research at Standard and Poor's said the offer was what she expected and provides a base for a negotiation. "But an agreement with a 75 per cent haircut does not assure Argentina's return to capital markets," she said.

Jose Barrionuevo, from Barclays Capital, was more upbeat. "I made lots of simulations about Argentina debt in the past weeks and their initial proposal is close to what I had figured," he said. "This opens the dialogue, and that is the most important now."