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Cablegate: About-Face: Argentine President Makes Surprise

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UNCLAS SECTION 01 OF 04 BUENOS AIRES 001330

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON ETRD PREL AR
SUBJECT: ABOUT-FACE: ARGENTINE PRESIDENT MAKES SURPRISE
ANNOUNCEMENT OF WILLINGNESS TO CONSIDER DEAL WITH BOND
HOLDOUTS

REF: A. BUENOS AIRES 1312
B. BUENOS AIRES 1011
C. BUENOS AIRES 1303

-------
Summary
-------

1. (SBU) Argentine President Cristina Fernandez de Kirchner
(CFK) made a surprise announcement yesterday that the GoA is
considering a proposal by three banks to re-open the 2005
debt exchange to holdout bondholders. Barclays, Citi, and
Deutsche Bank have developed the proposal, which will cover
the roughly $20 billion in bonds that remained untendered in
the 2005 exchange. The terms of the proposal will resemble
the 2005 restructuring arrangement, but will also bring in
billions of new financing for the GoA. As part of the same
deal, the three banks will simultaneously restructure the
GoA's guaranteed loan portfolio to smooth out the
amortization profile for 2009-2011. While there are many
unanswered questions and the initiative will likely months to
complete, the announcement represents a dramatic change of
course for the CFK administration, and together with the
September 2 decision to pay all Paris Club debt (Ref A) will
help Argentina re-engage with international capital markets.
End Summary.

---------------------------------
Cristina Shocks the Markets Again
---------------------------------

2. (SBU) Just three weeks after the President's surprise
September 2 declaration that the GoA will pay Paris Club
creditors, CFK shocked the Argentine financial world for a
second time September 23, declaring the GoA's readiness to
consider re-opening the 2005 debt exchange to holders of
untendered defaulted debt (the so-called "holdouts"). She
announced the possible initiative during her speeches in New
York before the Council of Foreign Relations and later during
the closing ceremony of the NASDAQ Exchange. Stating that
the GoA is prepared to consider a "very interesting" proposal
from "three very important international banks," CFK
emphasized that the GoA had not solicited this offer. On the
contrary, she noted, the banks had brought the proposal to
the GoA and that it was "much more favorable for Argentina
than the 2005 debt swap." She said she would personally
analyze the proposal and, if acceptable, send it to Congress
for approval.

3. (SBU) According to Post's private bank sources, GoA
Cabinet Chief Sergio Massa held one-on-one, off-the-record
briefings for financial journalists from the major Argentine
dailies about the same time that CFK was making the
announcement in New York. Massa reportedly outlined the
basic structure of the proposal to these reporters,
commenting that the GoA was partly motivated to pursue the
deal due to concerns about its capacity to meet its debt
obligations during 2009 - 2011, when financing needs increase
sharply to the range of $10-11 billion per year (from $6-8
billion per year).

--------------------------------------------- ----------
Barclays, Citi, Deutsche Bank Coordinate on Debt Swaps
--------------------------------------------- ----------

4. (SBU) As reported in the press and confirmed by Post's
banking sector sources, Barclays, Citi, and Deutsche Bank
(DB) are the three banks presenting this proposal. The
proposal originated with Barclays and U.S. hedge fund
Gramercy, which have both worked for almost a year to
convince high-level GoA officials to consider reopening the
2005 debt exchange. (Comment: Gramercy officials have been
in regular contact with State and Treasury officers on this
project, and Post reported status Ref B. The GoA has not
officially named any of the three banks, and only a few press
articles have mentioned that Gramercy may be involved. End
Comment.) Post also understands that Citi-Argentina Managing
Director Juan Bruchou recently lobbied CFK to consider
dealing with holdout bondholders. According to an Argentine
private banker close to the negotiations, the GoA asked
Barclays to coordinate on developing a final proposal with
Citi and also with DB, which was involved in the GoA's

BUENOS AIR 00001330 002 OF 004


ill-fated attempt earlier this year to refinance its
Guaranteed Loans (see para 6 below).

-----------------------------------
Early Details of Debt Swap Proposal
-----------------------------------

5. (SBU) According to Post sources, the proposal is similar
to the original deal offered during the 2005 debt exchange,
except that it offers fewer options and also has the key
feature of requiring participants to provide billions in
fresh financing. The main features are as follows:

-- The aggregate eligible amount included in the 2005 debt
exchange was $81.8 billion, comprising $79.7 billion
principal and $2.1 billion accrued but unpaid interest as of
December 31, 2001. The eligible amount tendered in the 2005
debt exchange was $62.3 billion, representing 76.15% of the
total, with untendered securities totaling $19.5 billion (or
almost 24% of the total).

-- The value of untendered debt has since risen to over $30
billion, including accrued interest, but the Barclays
proposal will apply only to the $19.5 principal.

-- The proposal envisions a swap of the original bonds for
U.S. dollar-denominated Discount bonds, maturing in 2033 and
issued under international law. It will include a 65%
haircut. Therefore, for every $1,000 of original bonds, the
bondholder will receive $350 in discount bonds. However, the
GoA will recognize interest accrued since the original
exchange, which it will pay by issuing additional Discount
33s. This will bring the total value to the range of $500
(or 50% of the face value of the untendered bonds). (During
the 2005 exchange, participants received Discounts issued
January 2003, with an 8.28% yield, in acknowledgment of
interest accrued between the default and 2005 exchange.
Participants in the re-opened exchange would also be paid in
January 2003 Discounts.)

-- The current market price of USD Discounts is about 70% of
face value, while untendered bonds have been trading around
25% of face value (and increased to 27-28 cents on the dollar
since CFK's announcement). Swapping $1,000 untendered bonds
for the equivalent of about $500 (face value) of USD
Discounts, trading at 70% face value, results in an effective
value of $350 (35% of $1,000). 35% represents about a 30%
premium over the current market price of 27-28 cents/dollar
for untendered bonds.

-- For every $1,000 of new USD Discount 33s, participants
must agree to purchase $250 of a 10-year, dollar-denominated
GoA bond, issued under international law.

-- Still unclear is whether the GoA will agree to attach GDP
Warrants to the Discounts. (During the 2005 exchange,
participants received 3 GDP Warrants per $100 of Discount
33s, but press reports speculate that the GoA might drop this
sweetener this time around.)

-- If 100% of holdouts participate in the renewed exchange,
the GoA will have to issue roughly $9 to 9.5 billion in USD
Discount 33s, but will also issue a 10-year bond of about
$2.25 billion, representing new financing.

-- In addition to Gramercy, which claims to be one of the
larger holders of untendered bonds, the Barclays group
reportedly has convinced many of the larger holdouts to
participate, including Mexican financier David Martinez and
Nicholas Stock of Italy. Post's contacts predict that over
90% of holdouts will participate, and that the GoA would try
to complete the exchange before the end of the year.
(Comment: On August 31, Finance Secretary Hernan Lorenzino
predicted to EconOff that if the GoA were to open the debt
exchange with an offer similar to the one from 2005, even
major litigants EM Ltd (controlled by Kenneth Dart) and NML
Capital Ltd (controlled by Elliott Associates) would buy in
-- see Ref C for background.)

-- Comment: The GoA cannot accept a proposal that offers a
better deal for holdouts than was offered in 2005 without
extending it to or facing legal challenges from participants

BUENOS AIR 00001330 003 OF 004


in the 2005 debt exchange. End Comment.

-----------------------------
Details of Mini-Debt Exchange
-----------------------------

6. (SBU) The three banks will simultaneously organize a
mini-debt exchange of local debt in order to smooth the GoA's
maturity profile for 2009-2011. The timeline will be similar
to the larger debt swap: completion before the end of 2008.
The GoA first pursued this initiative in March-April 2008,
but was stymied when a New York Judge, acting on a Holdout
lawsuit, froze a stock of "Global bonds" backing the
Guaranteed Loans that were to comprise the majority portion
of the exchange.

7. (SBU) According to Post's banking contacts, Barclays,
Citi, and DB will resurrect this mini-exchange, presenting
two distinct options. One will be aimed at foreign owners of
the debt instruments that will be exchanged, and the other
aimed at local bondholders (although there will apparently
not be any restriction on participation in either of the
offers).

-- For foreign bondholders, the GoA will exchange USD
Discount 33s. For every $100 of Discounts, participants will
have to exchange $70 of Guaranteed Loans and $30 new cash.

-- For local holders, the GoA would offer a one-to-one
exchange with a five-year peso-denominated bond, adjusted by
BADLAR (the interest rate on deposits of over one million
pesos).

-------
Comment
-------

8. (SBU) Citi's Juan Bruchou acknowledged to Charge September
23 that the parties are in the beginning stages of developing
this proposal and that it will be a complicated and lengthy
process, with many details still unclear. Aside from the
numerous questions regarding the specifics of the two debt
swaps, the key issue is whether Finance Secretary Lorenzino
is right that even EM Ltd and NML Capital Ltd (and the
thousands of Italian holdouts) will accept the deal.
Although failure to entice them into the deal would not
necessarily block the larger debt exchange, their continuing
legal efforts to block the exchanges would surely complicate
the mini-debt swap.

9. (SBU) Post's banking contacts believe that CFK's
about-face on holdouts (and to some extent on Paris Club) was
born out of necessity: 1) Holdout lawsuits have effectively
barred the GoA from international markets, just as its
financing needs are expected to spike during 2009-2011; 2)
the four-month farm strike weakened the economy and convinced
the GoA it could not raise taxes; 3) the August issuance of a
dollar-denominated bond, issued under local law, to Venezuela
at a yield of almost 15% proved to the GoA that it could no
longer rely on Venezuelan financing; and 4) the deteriorating
global financial crisis and accompanying flight to quality
convinced GoA officials that they needed to act to stabilize
Argentina's financial sector and halt the capital outflow.

10. (SBU) Regardless of the motivation, Post's local
financial sector contacts see this latest initiative as a
positive development, as Argentina will be forced to submit
somewhat to market disciplines. Significantly, it will also
strengthen the political power of the internationally
oriented pragmatists who are behind these recent policy
shifts (Cabinet Chief Massa, Central Bank President Martin
Redrado, and Finance Secretary Lorenzino) -- even as CFK
protected her left flank during her September 23 address to
the UNGA (septel) by attributing the current financial crisis
to what she called the "jazz effect," which she defined as
"first economy of the world's" errant belief that "the market
would solve everything." Rhetorical feints aside, re-opening
the debt exchange and paying the Paris Club will help
normalize Argentina's relationship with international capital
markets, open access to cheaper financing, lessen concerns
about possible default, and should lead to reduced country
risk and higher ratings from the ratings agencies -- all of

BUENOS AIR 00001330 004 OF 004


which will benefit the economy and, especially, the Argentine
financial sector.
KELLY

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