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Mon, Nov 05, 2001 - Page 19 News List

Argentina's plan to cope with debt burden presents challenges

Argentina's debt problems have not caused too much concern among its neighbors or elsewhere, but if the country defaults then it may lead to a ripple effect

By Joanthan Fuerbringer  /  NY TIMES NEWS SERVICE , NEW YORK

Argentina's newest proposal to reduce its debt burden might lead to a default that could make it very difficult for emerging market countries to borrow in the future.

So far, there have not been too many ripples beyond the impact on Argentina's neighbor, Brazil.

But the longer-term outlook depends a lot on how the debt is restructured to lower Argentina's financial burden and whether investors are forced to accept a package they are unhappy with.

Problems with the restructuring program are already appearing.

"In the short run, this has been telegraphed so long that the knock-on effect is going to be muted," said Carl Ross, senior managing director for emerging markets at Bear Stearns. "I am concerned about the long-term contagion. If Argentina defaults, there will not be an immediate cascading of countries defaulting. But over time there could be.

"In the future," he said, "countries looking at Argentina's experience might conclude that if this is where we are going to end up anyway, why put our populations through the pain?" Argentina has already suffered through four years of recession and large budget cuts to meet its debt payments.

The issue of whether Argentina defaults during its effort to restructure as much as US$95 billion in bonds held by Argentine banks and institutions and foreigners is complicated by the definition of what is a default. But a restructuring that leaves many investors unhappy with the deal will not be positive, Ross said.

One investor in emerging market debt said that a drawn out and messy restructuring of Argentina's debt, especially if it were repeated in other countries, could dry up the lending pool for emerging market countries.

Argentina faces other tough problems that could undermine its effort to reach a deal with its creditors. Problems include declining tax revenue as the global economic slowdown drags Argentina's economy lower; the need to meet a zero deficit target to comply with terms for additional aid from the International Monetary Fund; difficult negotiations with the country's provinces on cutting spending; the withdrawal of money from the banking system by frightened depositors; and obtaining the additional cash needed to offer its creditors a debt swap that is attractive to them while also reducing the country's debt burden enough to ease the pressure on the government and the economy.

Beyond all of that, any recovery for Argentina depends on turning the economy around, a task that has become even more difficult since the terrorist attack on the US.

"There is a lot of uncertainty right now," said Joyce Chang, global manager of international fixed-income research at J.P. Morgan. She said that the prices of Argentina's bonds in the market already showed that investors "are pricing in an effective default."

The fact that the fallout from the current stage of Argentina's crisis has been limited is seen in the performance of bond prices this week. While Argentina's floating rate bond maturing in 2005 fell 17.5 points, or 27.6 percent, to US$46, the popular Brazilian C bond maturing in 2014 dropped just 1.75 points, or 2.5 percent.

Bond prices in the rest of Latin America fell even less, with a popular bond in Mexico down just three-tenths of a point. And the Brazilian real, which has fallen 27 percent this year as the Argentine crisis deepened, has been in a mild rally since Sept. 21, rising 6 percent.

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