BUENOS AIRES Argentina is planning a comeback to international debt markets eight years after a huge default and, if the timing is right, investors may embrace the former pariah as potential returns trump its bad reputation.
Investors are impatient with paltry rewards from bonds in developed countries after central banks around the world slashed interest rates to fight recession, and they could be attracted to a juicy rate on an Argentine government bond.
"There'll be demand if risk appetite is high," said Sergio Trigo, chief investment officer for emerging markets fixed income at Fortis Investments in London. But "it will depend on the international risk scenario at the time of the issue."
With violent swings in global markets between risk appetite and risk aversion, timing is crucial for Argentina, which could take advantage of positive sentiment toward emerging markets as it tries to raise funds to cover looming financing holes.
Latin America's third biggest economy, with a history of booms and busts, defaulted on $100 billion in debt in 2001 as the currency collapsed and the free-spending 1990s unraveled into a deep recession, hurting pension funds from Italy to Japan.
In 2005 Argentina told holders of its defaulted bonds to take about 30 cents on the dollar or nothing at all. About 75 percent of the investors took the deal and the rest decided to hold out for a better deal.
Lawsuits from some so-called holdouts are now preventing Argentina issuing a new global bond. Also, Argentina has yet to reach a repayment agreement on close to $7 billion in defaulted loans from wealthy countries known as the Paris Club.
TIMING DEPENDS ON MARKETS
Economy Minister Amado Boudou is working on a proposal to the holdouts to finally accept their losses and desist with lawsuits, but he told Reuters last week the timing for a deal depends on market dynamics.
Boudou also recently said Argentina has the luxury to wait for the right conditions and can hold out for rates of between 6 percent and 11 percent, rather than rushing out a bond now at 13.5 percent.
Trigo, who helps manage $2.5 billion in emerging market assets including Argentine debt, said a bond right now could be premature and expensive for the country. "My guess is that this time they will wait a bit longer," he said.
Argentina's neighbors Uruguay and Brazil recently made successful issues of debt at much lower interest rates but they have much higher credit scores.
Boudou is also working to restore credibility to Argentina's economic data which has been widely questioned for being politically manipulated.
In addition, he is negotiating with the International Monetary Fund to conduct an economic review that could reassure investors. Many Argentines blame the IMF's policy recommendations for bringing about the 2001-02 crisis
"If they clear the hurdles with the holdouts and other creditors, and if they do come with the global bond, it will be very well received," said Katherine Rooney, emerging markets strategist at Bulltick Capital Markets in Miami.
CONCRETE STEPS NEEDED
Argentine bonds are among the world's top performing this year, with some gaining more than 60 percent, on expectations the country will issue at least $1 billion in debt to international investors, easing its 2010 financing needs.
While Boudou says he does not want to jump the gun, the Argentine debt rally could fizzle if he does not make any concrete announcements soon.
Some analysts say he could be waiting for a final green light from center-left President Cristina Fernandez, a frequent critic of capital markets and the IMF.
While there are still doubts over whether Fernandez and her husband, top advisor and predecessor, ex-President Nestor Kirchner, will approve the steps to get back to markets, they have a powerful incentive in growing budget constraints.
The economy rebounded strongly from the 2001-02 crisis and grew an average of 8.5 percent over the next six years.
But now growth in tax returns has slumped due to the global slowdown and the government has a financing shortfall of up to $7 billion next year, according to analysts.
Argentina still needs to address its lack of credibility among investors, especially those who were burned before, says Stefano Costagli, a fund manager at Vegagest SGR, an investment management firm in San Miniato, northern Italy, with 2.5 billion euros ($1.7 billion) in assets in emerging markets.
"Argentina's reputation can't be ignored," said Costagli, whose firm used to have a significant position in Argentina's government bonds but since the default has kept only a very small amount.
(Editing by Fiona Ortiz and William Schomberg)