NEW YORK, Aug 21 (IFR) - Argentina's latest debt swap
proposal may have made resolution of its default mess an even
more distant prospect, but the sovereign's bond prices still
remain surprisingly robust.
Indeed the latest gambit in the long-running Argentine saga
- a complicated swap that risks running afoul of US law and that
most believe can't work - has hardly hit prices at all.
Argentina's dollar bonds dropped two points Wednesday when
the debt swap plan was announced, but that was a far cry from
the freefall that many in the market were expecting.
Discounts were trading Thursday at 79.50-81.00, down from
the 83.25 seen at the Tuesday close, while Pars were quoted as
low as 46.50-47.50 before actually rebounding to 49.75-50.25.
"The reality hasn't hit bond prices," said Claudia Ribeiro
de Castro, a senior analyst at Oppenheimer Funds. "To see
Discounts with an 80 handle seems strange."
One reason may be that most major holders of the sovereign's
debt are now hedge funds and distress players who have already
accepted that the Argentina fight will be a long one.
With a longer-term view, and being less worried about
short-term fluctuations, they may now see no hope of a
resolution until perhaps 2016, months after the next
Until then, there may be little to do but wait.
"Investors are readjusting expectations slowly from what
they thought was a short-lived technical default to what might
become a fully fledged and long default," said Alejo Czerwonko,
an economist in the chief investment office of UBS Wealth
He called Argentina's latest proposal "yet more evidence
that the willingness to negotiate with holdouts is just not
LONG ROAD AHEAD
The legal technicalities of the debt swap proposal alone
mean that investors will see no immediate resolution to a debt
battle that has churned on for more than a decade.
US judge Thomas Griesa has ruled Argentina must make holdout
creditors whole when it next makes a payment to holders of its
After a US Supreme Court appeal failed, Argentina now wants
to swap the 2005 and 2010 restructured bonds into local-law
instruments in an effort to get round Griesa's ruling.
While Argentina may not fear being in contempt of US court,
however, many connected to Argentina's debt will - meaning the
proposal is fanciful at best, if not outright impossible.
Under the plan, Bank of New York Mellon (BNY) would be
replaced as fiduciary agent on the bonds with Argentina's
state-controlled Banco de La Nacion.
BNY and other intermediaries such as DTC, Euroclear and
Clearstream would likely need to be all on board for the swap to
"Since the bonds are in global form, they have to be
actually exchanged in the clearing systems," said Antonia
Stolper, a partner at law firm Shearman & Sterling, which is not
directly involved in the litigation against Argentina.
"If the clearing systems are enjoined from helping the
exchange offer pursuant to Judge Griesa's order, it's hard to
see how you actually effectuate the exchange offer."
The court would "hold in contempt anyone helping Argentina
circumvent the US ruling", said Czerwonko from UBS.
"We are very skeptical that the proposed plan will be
implementable," he said.
SUPPORT AT HOME
Many if not most Argentines heartily agree with the
administration of President Cristina Fernandez de Kirchner,
which calls the holdouts - led by NML Capital and Aurelius
Capital - "vulture funds".
With the next presidential election not coming until October
2015, Kirchner has already suggested that any resolution of the
fight should be left for her successor.
And many see this week's debt swap proposal as a political
stunt to play to the domestic audience and not a realistic
option to save Argentina from further economic turmoil.
"Argentina is an example of how domestic politics is more
important than gaining access to the capital market," said Peter
Lannigan, head of EM strategy at CRT Capital Group.
"Oftentimes political objectives trump what governments
should be doing economically," he said.
But some observers suggest that, as the clock ticks away,
Argentina may find it needs access again to the credit markets -
and to dollars - before Kirchner's term expires.
And that, they say, could provoke a significant re-think in
"The economy in Argentina could put pressure on the Kirchner
administration to change its stance," said John Baur, a
portfolio manager at Eaton Vance, which holds Argentine debt.
"We will be looking at how that plays out - and at how
Kirchner's approval ratings evolve over the next few months."
(Reporting by Paul Kilby and Davide Scigliuzzo; Editing by Marc