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UNCLAS SECTION 01 OF 04 BUENOS AIRES 001330 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PREL AR
SUBJECT: ABOUT-FACE: ARGENTINE PRESIDENT MAKES SURPRISE 
ANNOUNCEMENT OF WILLINGNESS TO CONSIDER DEAL WITH BOND 
HOLDOUTS 
 
REF: A. BUENOS AIRES 1312 
     ¶B. BUENOS AIRES 1011 
     ¶C. BUENOS AIRES 1303 
 
------- 
Summary 
------- 
 
¶1. (SBU) Argentine President Cristina Fernandez de Kirchner 
(CFK) made a surprise announcement yesterday that the GoA is 
considering a proposal by three banks to re-open the 2005 
debt exchange to holdout bondholders.  Barclays, Citi, and 
Deutsche Bank have developed the proposal, which will cover 
the roughly $20 billion in bonds that remained untendered in 
the 2005 exchange.  The terms of the proposal will resemble 
the 2005 restructuring arrangement, but will also bring in 
billions of new financing for the GoA.  As part of the same 
deal, the three banks will simultaneously restructure the 
GoA's guaranteed loan portfolio to smooth out the 
amortization profile for 2009-2011.  While there are many 
unanswered questions and the initiative will likely months to 
complete, the announcement represents a dramatic change of 
course for the CFK administration, and together with the 
September 2 decision to pay all Paris Club debt (Ref A) will 
help Argentina re-engage with international capital markets. 
End Summary. 
 
--------------------------------- 
Cristina Shocks the Markets Again 
--------------------------------- 
 
¶2. (SBU) Just three weeks after the President's surprise 
September 2 declaration that the GoA will pay Paris Club 
creditors, CFK shocked the Argentine financial world for a 
second time September 23, declaring the GoA's readiness to 
consider re-opening the 2005 debt exchange to holders of 
untendered defaulted debt (the so-called "holdouts").  She 
announced the possible initiative during her speeches in New 
York before the Council of Foreign Relations and later during 
the closing ceremony of the NASDAQ Exchange.  Stating that 
the GoA is prepared to consider a "very interesting" proposal 
from "three very important international banks," CFK 
emphasized that the GoA had not solicited this offer.  On the 
contrary, she noted, the banks had brought the proposal to 
the GoA and that it was "much more favorable for Argentina 
than the 2005 debt swap."  She said she would personally 
analyze the proposal and, if acceptable, send it to Congress 
for approval. 
 
¶3. (SBU) According to Post's private bank sources, GoA 
Cabinet Chief Sergio Massa held one-on-one, off-the-record 
briefings for financial journalists from the major Argentine 
dailies about the same time that CFK was making the 
announcement in New York.  Massa reportedly outlined the 
basic structure of the proposal to these reporters, 
commenting that the GoA was partly motivated to pursue the 
deal due to concerns about its capacity to meet its debt 
obligations during 2009 - 2011, when financing needs increase 
sharply to the range of $10-11 billion per year (from $6-8 
billion per year). 
 
--------------------------------------------- ---------- 
Barclays, Citi, Deutsche Bank Coordinate on Debt Swaps 
--------------------------------------------- ---------- 
 
¶4. (SBU) As reported in the press and confirmed by Post's 
banking sector sources, Barclays, Citi, and Deutsche Bank 
(DB) are the three banks presenting this proposal.  The 
proposal originated with Barclays and U.S. hedge fund 
Gramercy, which have both worked for almost a year to 
convince high-level GoA officials to consider reopening the 
2005 debt exchange.  (Comment:  Gramercy officials have been 
in regular contact with State and Treasury officers on this 
project, and Post reported status Ref B.  The GoA has not 
officially named any of the three banks, and only a few press 
articles have mentioned that Gramercy may be involved.  End 
Comment.)  Post also understands that Citi-Argentina Managing 
Director Juan Bruchou recently lobbied CFK to consider 
dealing with holdout bondholders.  According to an Argentine 
private banker close to the negotiations, the GoA asked 
Barclays to coordinate on developing a final proposal with 
Citi and also with DB, which was involved in the GoA's 
 
BUENOS AIR 00001330  002 OF 004 
 
 
ill-fated attempt earlier this year to refinance its 
Guaranteed Loans (see para 6 below). 
 
----------------------------------- 
Early Details of Debt Swap Proposal 
----------------------------------- 
 
¶5. (SBU) According to Post sources, the proposal is similar 
to the original deal offered during the 2005 debt exchange, 
except that it offers fewer options and also has the key 
feature of requiring participants to provide billions in 
fresh financing.  The main features are as follows: 
 
-- The aggregate eligible amount included in the 2005 debt 
exchange was $81.8 billion, comprising $79.7 billion 
principal and $2.1 billion accrued but unpaid interest as of 
December 31, 2001.  The eligible amount tendered in the 2005 
debt exchange was $62.3 billion, representing 76.15% of the 
total, with untendered securities totaling $19.5 billion (or 
almost 24% of the total). 
 
-- The value of untendered debt has since risen to over $30 
billion, including accrued interest, but the Barclays 
proposal will apply only to the $19.5 principal. 
 
-- The proposal envisions a swap of the original bonds for 
U.S. dollar-denominated Discount bonds, maturing in 2033 and 
issued under international law.  It will include a 65% 
haircut.  Therefore, for every $1,000 of original bonds, the 
bondholder will receive $350 in discount bonds.  However, the 
GoA will recognize interest accrued since the original 
exchange, which it will pay by issuing additional Discount 
33s.  This will bring the total value to the range of $500 
(or 50% of the face value of the untendered bonds).  (During 
the 2005 exchange, participants received Discounts issued 
January 2003, with an 8.28% yield, in acknowledgment of 
interest accrued between the default and 2005 exchange. 
Participants in the re-opened exchange would also be paid in 
January 2003 Discounts.) 
 
-- The current market price of USD Discounts is about 70% of 
face value, while untendered bonds have been trading around 
25% of face value (and increased to 27-28 cents on the dollar 
since CFK's announcement).  Swapping $1,000 untendered bonds 
for the equivalent of about $500 (face value) of USD 
Discounts, trading at 70% face value, results in an effective 
value of $350 (35% of $1,000).  35% represents about a 30% 
premium over the current market price of 27-28 cents/dollar 
for untendered bonds. 
 
-- For every $1,000 of new USD Discount 33s, participants 
must agree to purchase $250 of a 10-year, dollar-denominated 
GoA bond, issued under international law. 
 
-- Still unclear is whether the GoA will agree to attach GDP 
Warrants to the Discounts.  (During the 2005 exchange, 
participants received 3 GDP Warrants per $100 of Discount 
33s, but press reports speculate that the GoA might drop this 
sweetener this time around.) 
 
-- If 100% of holdouts participate in the renewed exchange, 
the GoA will have to issue roughly $9 to 9.5 billion in USD 
Discount 33s, but will also issue a 10-year bond of about 
$2.25 billion, representing new financing. 
 
-- In addition to Gramercy, which claims to be one of the 
larger holders of untendered bonds, the Barclays group 
reportedly has convinced many of the larger holdouts to 
participate, including Mexican financier David Martinez and 
Nicholas Stock of Italy.  Post's contacts predict that over 
90% of holdouts will participate, and that the GoA would try 
to complete the exchange before the end of the year. 
(Comment:  On August 31, Finance Secretary Hernan Lorenzino 
predicted to EconOff that if the GoA were to open the debt 
exchange with an offer similar to the one from 2005, even 
major litigants EM Ltd (controlled by Kenneth Dart) and NML 
Capital Ltd (controlled by Elliott Associates) would buy in 
-- see Ref C for background.) 
 
-- Comment:  The GoA cannot accept a proposal that offers a 
better deal for holdouts than was offered in 2005 without 
extending it to or facing legal challenges from participants 
 
BUENOS AIR 00001330  003 OF 004 
 
 
in the 2005 debt exchange.  End Comment. 
 
----------------------------- 
Details of Mini-Debt Exchange 
----------------------------- 
 
¶6. (SBU) The three banks will simultaneously organize a 
mini-debt exchange of local debt in order to smooth the GoA's 
maturity profile for 2009-2011.  The timeline will be similar 
to the larger debt swap: completion before the end of 2008. 
The GoA first pursued this initiative in March-April 2008, 
but was stymied when a New York Judge, acting on a Holdout 
lawsuit, froze a stock of "Global bonds" backing the 
Guaranteed Loans that were to comprise the majority portion 
of the exchange. 
 
¶7. (SBU) According to Post's banking contacts, Barclays, 
Citi, and DB will resurrect this mini-exchange, presenting 
two distinct options.  One will be aimed at foreign owners of 
the debt instruments that will be exchanged, and the other 
aimed at local bondholders (although there will apparently 
not be any restriction on participation in either of the 
offers). 
 
-- For foreign bondholders, the GoA will exchange USD 
Discount 33s.  For every $100 of Discounts, participants will 
have to exchange $70 of Guaranteed Loans and $30 new cash. 
 
-- For local holders, the GoA would offer a one-to-one 
exchange with a five-year peso-denominated bond, adjusted by 
BADLAR (the interest rate on deposits of over one million 
pesos). 
 
------- 
Comment 
------- 
 
¶8. (SBU) Citi's Juan Bruchou acknowledged to Charge September 
23 that the parties are in the beginning stages of developing 
this proposal and that it will be a complicated and lengthy 
process, with many details still unclear.  Aside from the 
numerous questions regarding the specifics of the two debt 
swaps, the key issue is whether Finance Secretary Lorenzino 
is right that even EM Ltd and NML Capital Ltd (and the 
thousands of Italian holdouts) will accept the deal. 
Although failure to entice them into the deal would not 
necessarily block the larger debt exchange, their continuing 
legal efforts to block the exchanges would surely complicate 
the mini-debt swap. 
 
¶9. (SBU) Post's banking contacts believe that CFK's 
about-face on holdouts (and to some extent on Paris Club) was 
born out of necessity: 1) Holdout lawsuits have effectively 
barred the GoA from international markets, just as its 
financing needs are expected to spike during 2009-2011; 2) 
the four-month farm strike weakened the economy and convinced 
the GoA it could not raise taxes; 3) the August issuance of a 
dollar-denominated bond, issued under local law, to Venezuela 
at a yield of almost 15% proved to the GoA that it could no 
longer rely on Venezuelan financing; and 4) the deteriorating 
global financial crisis and accompanying flight to quality 
convinced GoA officials that they needed to act to stabilize 
Argentina's financial sector and halt the capital outflow. 
 
¶10. (SBU) Regardless of the motivation, Post's local 
financial sector contacts see this latest initiative as a 
positive development, as Argentina will be forced to submit 
somewhat to market disciplines.  Significantly, it will also 
strengthen the political power of the internationally 
oriented pragmatists who are behind these recent policy 
shifts (Cabinet Chief Massa, Central Bank President Martin 
Redrado, and Finance Secretary Lorenzino) -- even as CFK 
protected her left flank during her September 23 address to 
the UNGA (septel) by attributing the current financial crisis 
to what she called the "jazz effect," which she defined as 
"first economy of the world's" errant belief that "the market 
would solve everything."  Rhetorical feints aside, re-opening 
the debt exchange and paying the Paris Club will help 
normalize Argentina's relationship with international capital 
markets, open access to cheaper financing, lessen concerns 
about possible default, and should lead to reduced country 
risk and higher ratings from the ratings agencies -- all of 
 
BUENOS AIR 00001330  004 OF 004 
 
 
which will benefit the economy and, especially, the Argentine 
financial sector. 
KELLY