June 23, 2010 / 7:06 PM / 8 years ago

UPDATE 3-Argentina tops debt swap goal but lawsuits linger

* Argentina achieves 66 pct participation in debt swap

* Analysts say may not be enough to tap markets again

* Holdouts vow to continue legal battle against Argentina (Adds comment from president, holdout investor, Moody‘s)

By Magdalena Morales and Hilary Burke

BUENOS AIRES, June 23 (Reuters) - Argentina attracted a better-than-expected 66 percent acceptance for its $18.3 billion debt swap, but it may not be enough for the country to return to global markets eight years after its record default.

The government said on Wednesday it had surpassed its goal of at least 60 percent participation, adding that this will enable Latin America’s No. 3 economy to issue debt abroad and lower borrowing costs for the country’s provinces and companies.

But about $6 billion is still owned by “holdout” creditors who rejected the swap and a harsh 2005 restructuring. Their lawsuits have blocked international bond sales up to now and could thwart the government’s plans to keep stoking high state spending ahead of an October 2011 presidential election.

In addition, volatile global markets tied to Europe’s debt crisis will keep Argentina from issuing debt at a yield of below 10 percent, as the government has insisted.

Although Fitch said it would probably raise Argentina’s debt rating from “selective default,” the country’s bonds would still be ranked as junk by all the main ratings agencies.

“This is a very important step that gets rid of what has been the most severe restriction on the Argentine economy in recent decades,” President Cristina Fernandez said in a televised speech.

Fernandez touted the 75 percent “haircut,” or loss, accepted by Argentina’s creditors as a historic feat.

Between this swap and the 2005 restructuring, the government has settled 92.4 percent of the roughly $100 billion it defaulted on during a devastating 2001-2002 economic crisis.

“The global acceptance rate allows us to think optimistically about the possibility of finally closing this chapter of Argentina’s history,” Economy Minister Amado Boudou told a news conference. “The vulture funds are still around, none of them participated, but they are clearly isolated,” he added.

So-called vulture funds buy developing countries’ sovereign debt at a discount and sue to recover its full value. Several major funds have won lawsuits against Argentina in New York.

Boudou said the country is “not in a rush” to issue new debt. The government had originally planned to sell a 2017 global bond in tandem with the debt swap, but the European debt crisis and its impact on markets forced officials to shelve that plan. [ID:nN23137230]

It was unclear whether Argentina would be able to issue debt under U.S. legislation without the courts seizing any money that would change hands in the operation to satisfy damage awards.

“Anytime anybody tries to raise money for Argentina, we’re going to try to get that money or stop the deal,” an official at a large investment fund that did not participate in the swap told Reuters.

“So the notion that they get back into the capital markets quickly or easily I think is completely misguided ... We would say their fight with holdouts is really just beginning.”


Argentina initially planned the debt swap to help ease tight financing this year. But the government is using central bank reserves to meet debt payments this year after forcing out the central bank chief, who opposed the measure.

Boudou said the swap would imply an increased fiscal burden of $365 million in 2011 and $371 million the following year.

The debt exchange drew disappointing initial participation among institutional investors as the euro zone troubles cut into the deal’s market value by hitting Argentine bond prices.

In the swap, investors tendered their defaulted paper for new bonds and, in the case of retail creditors, cash. The government also offered GDP warrants linked to the country’s growth as an incentive to participate.

The deal was similar to the 2005 restructuring spearheaded by former Argentine President Nestor Kirchner, husband and predecessor of President Fernandez. Kirchner is angling to return to power in next year’s election. [ID:nN23212884]

“This reduces the amount of holdouts, but in itself will not allow market access,” said Siobhan Morden, head of Latin America strategy at RBS in Stamford, Connecticut.

“There are still a significant number of holdouts remaining and this unfortunately is not part of a broader policy shift. We’ll have to wait for the Kirchners’ exodus for that to happen,” she added.

Argentina’s economy is rebounding this year and is seen growing above 5 percent. But inflation is running at around 25 percent annually, government statistics are widely questioned and Argentina must still repay some $7.5 billion in defaulted debt to the Paris Club of wealthy creditor nations.

Gabriel Torres at Moody’s said the agency had not decided whether the swap was enough to warrant a better rating for Argentine debt, which is deep in speculative territory.

But Fitch told Reuters the acceptance rate on the debt exchange was “probably sufficient” for the country’s “selective default” rating to be raised.

“The post-default rating will probably be in a highly speculative, sub-investment category. Somewhere in the single B range,” said Casey Reckman, Fitch’s lead analyst on Argentina. (Additional reporting by Kevin Gray, Jorge Otaola, Alexandra Ulmer and Luis Andres Henao in Buenos Aires and Daniel Bases in New York; Editing by Simon Gardner and Dan Grebler)

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