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DE RUEHBU #0118/01 0481455
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FM AMEMBASSY BUENOS AIRES
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UNCLAS BUENOS AIRES 000118 
 
C O R R E C T E D   C O P Y - PARAGRAPHS WERE NOT MARKED SBU FOR 
SENSITIVE CAPTION CABLE. 
 
SENSITIVE 
SIPDIS 
TREASURY PLEASE PASS TO WLINDQUIST 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV PREL AR
SUBJECT: Argentina: Finance Secretary Says Full Speed Ahead on 
Holdout Deal 
 
REF: BUENOS AIRES 55 
 
Summary 
 
------------- 
 
 
 
¶1.  (SBU) Argentine Finance Secretary Hernan Lorenzino stressed in 
a February 1 meeting that the debt exchange is moving ahead at full 
speed.  He repeatedly emphasized that there are no political 
obstacles to moving it forward and that the Central Bank and 
Redrado affair is not affecting the transaction in any way.  He 
lauded the SEC's handling of the approval process, especially in 
light of attempts by vulture funds to convince the agency to 
disrupt the process. The GOA still hopes to launch the proposal in 
February, but that depends on the SEC's response to the latest GOA 
submissions in answer to SEC questions.  When initiated, the deal 
is expected to be open for thirty-days, to give small retail 
investors adequate time to evaluate it and participate.  Saying 
that the pending offer is still worth more now -- 50 to 55 cents on 
the dollar despite the recent decline in the bond market -- than 
when originally formulated, Lorenzino expects a very high 
institutional participation rate.  On the Azurix ICSID case, 
Lorenzino confirmed that negotiations are well advanced, but could 
be complicated somewhat by the need to secure the approval of the 
deal by the government of Buenos Aires Province.  End Summary. 
 
 
 
No Political Obstacles to Holdout Deal 
 
--------------------------------------------- ----- 
 
 
 
¶2.  (SBU) On February 1,WHA/BSC Office Director Milton Drucker and 
Dep EconCouns met with Secretary of Finance Hernan Lorenzino and 
Undersecretary of Finance Adrian Cosentino to discuss the latest 
developments with regard to the proposed GOA debt restructuring and 
ICSID arbitration cases.  Lorenzino welcomed the visit, which he 
described as "timely," noting that the debt exchange offer is 
moving ahead at full speed.  He added that both the President and 
Minister of Economy Boudou fully support the transaction and 
emphasized repeatedly throughout the discussion that there are no 
political obstacles to moving forward.  He also said several times 
that the Central Bank and Redrado affair is unrelated to the debt 
transaction and is not affecting it. 
 
 
 
SEC Approval Process Going Well 
 
--------------------------------------------- 
 
 
 
¶3.  (SBU) Lorenzino explained that as part of the approval process 
for the debt restructuring, the U.S. Security and Exchange 
Commission (SEC) requested fifty-one clarifications after reviewing 
the GOA's over-300 page submission.  The GOA submitted its response 
on January 27 and is currently waiting for the SEC's final approval 
or request for additional information, which he very much hoped 
would not be as extensive as the first one.  Following the SEC's 
review, the GOA will file paperwork with securities regulatory 
agencies in Luxemburg, Italy, and Japan, which generally wait to 
begin their approval processes until after the SEC issues its final 
approval.  Lorenzino expressed satisfaction with how the SEC is 
 
 
conducting itself, particularly in light of what he characterized 
as "the extreme pressure the SEC is facing from lobbies and funds 
unwilling to participate in the debt exchange."  He explained that 
"vulture funds" have made several negative presentations about the 
GOA proposal to the SEC in the last few months, apparently drawing 
on the Argentine press to dredge up information to support their 
case, and quoting Argentine opposition figures who oppose the deal. 
 
 
 
 
Hope for February Launch 
 
----------------------------------- 
 
 
 
¶4.  (SBU) Lorenzino said that the GOA hopes to be able to launch 
the transaction in February.  The expectation is that the deal will 
remain open for a period of thirty-days to allow small retail 
holders enough time to evaluate and then participate in the 
exchange.  Depending on the preliminary participation rate in the 
transaction and in an effort to promote a higher participation rate 
by retail investors, the GOA may consider extending the period 
during which investors can decide to participate.  He insisted that 
the GOA is working to launch as soon as possible. 
 
 
 
Composition of Holdouts 
 
--------------------------------- 
 
 
 
¶5.  (SBU) Secretary Lorenzino explained that the holdouts' 
principal claims total USD 20 billion (without interest).  Although 
he said that it is impossible to know how the claims are divided 
up, he indicated that the following is as good an estimate as 
possible:  USD 3 billion are held by several vulture funds, based 
in the Cayman Islands.  These funds are not willing to participate 
in the exchange, and will continue to pursue legal remedies.  USD 
13-15 billion is held by institutional investors based mainly in 
New York, Boston and London.  These investors are enthusiastic at 
the prospect of a deal.  Finally, USD 2- 4 billion is held by small 
retail investors, mainly in Europe. 
 
 
 
¶6.  (SBU) The great majority is from Italy, and there are some from 
Germany and Japan as well.  While the amount held by retail 
investors is somewhat unclear, Lorenzino believes it is closer to 
USD 2 billion than USD 4 billion, since he said that many of the 
original retail investors sold their holdings of defaulted GOA 
bonds to institutional investors.  In a meeting last week, Italian 
Embassy DCM Guglielmino told the DCM that Lorenzino had recently 
been to Italy to garner GOI and investor support for the debt swap. 
He said that there are about 180,000 small Italian investors who 
still hold defaulted Argentine paper, down from about 400,000 at 
the time of the actual default.  The Italian government was hoping 
that the GOA would be willing to sweeten the deal somewhat for 
them, but Lorenzino indicated that the GOA had to offer the same 
deal to all of the affected investors.  In the meeting with 
Drucker, Lorenzino noted that the 30-day subscription period was 
intended as a sweetener for small investors, since the 
institutional investors who wanted to participate would do so 
immediately. 
 
50-55 Cents on the Dollar 
 
--------------------------------- 
 
 
 
¶7.  (U) Lorenzino stated that in spite of the recent bond market 
decline, the offer is still worth more than when the GOA started 
working on it.  Without going into much detail, he assessed that 
the offer would end up being valued at around 50-55 cents on the 
dollar.  He said that most institutional investors would 
participate since they had purchased their bonds at much lower 
prices.  Furthermore, he said that the spread between the old 
eligible bonds and the new bonds has always been positive, which 
makes the transaction attractive to these investors.  However, this 
is not the case for retail investors, who had generally purchased 
their bonds at close to par value. 
 
 
 
Azurix ICSID Case 
 
------------------------- 
 
 
 
¶8.  (U) Lorenzino confirmed that the GOA -- through the Treasury 
Attorney's office (Procuracion General del Tesoro) -- and Azurix 
are in negotiations and well on the way to reaching an agreement 
and finalizing a term sheet.  He added that the Azurix case is 
complex as it involves the Province of Buenos Aires, which means 
that any agreement reached by the Federal Government must also be 
endorsed by the province.  Drucker stressed the importance of 
successfully concluding these negotiations, which would serve as a 
precedent in dealing with other ICSID cases. 
 
 
 
¶9.  (U) Mr. Drucker has not seen this cable and requested that it 
go out without his clearance. 
MARTINEZ