One reason for the moderate reaction is that many investors have already pulled out of Argentina and the countries they think could be hurt by its crisis. In addition, there are fewer big bettors in emerging markets since Russia defaulted on its debt in 1998.
Four large US banks have significant exposure to Argentine and other Latin American debt, and a new Lehman Brothers analysis says they "have been under pressure on renewed concerns about Argentina's debt woes." The four are FleetBoston, Citigroup, Bank of America and J.P. Morgan Chase.
Lehman Brothers said that FleetBoston's Latin American loans accounted for about 10 percent of net income and noted that Citigroup said in the second quarter that Argentine loans contributed less than 2 percent to earnings. J.P. Morgan Chase and Bank of America each have about US$900 million in loans in Argentina.
Problems with Argentina's plan to reduce its debt burden arose as soon as the country issued the barest of details. In a statement of economic policy changes to deal with the crisis, the government said Thursday that it wanted to save about US$4 billion a year in debt service costs by cutting the aggregate interest rate on its debt to 7 percent from about 11 percent now. That is a reduction of nearly 40 percent. In exchange, the government has said it will offer guarantees of payment of principle and interest.
"It is difficult to believe that they have enough credit enhancements to go from 11 percent to 7 percent," Ross of Bear Stearns said, referring to the sweeteners the government would need to offer investors. "This is why the market is a little confused right now."
Because there are no details, investors are assuming a debt restructuring would be something like the famous Brady bonds used in the late 1980s and early 1990s to restructure Latin American debt, including that of Argentina. All those deals included significant debt reduction in exchange for guarantees of principle and interest payments.
The trader in emerging market debt who asked not to be named said there was a 50 percent chance now that the restructuring of Argentina's debt would be "a long, drawn out messy process."
On the issue of default, the major credit rating agencies have already indicated that they will give a default rating to the new bonds in a debt exchange like the one Argentina is contemplating. That is because the value of the new bonds will be less than the value of the old bonds. A legal default, according to analysts, is more complicated, requiring a triggering event, like missing an interest or principle payment, followed by a vote of a majority or more of the bondholders to force the default.
Argentina says that it wants its exchange to be voluntary and that if enough bondholders agree to it, a legal default could be avoided, analysts said. But there will be a lot of pressure on investors, including banks and pension funds in Argentina, to agree, so a voluntary agreement may be less voluntary than it appears. And one may not be able to be reached.
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