It's not soccer, it's debt negotiations. And Argentina is playing the mother of all matches.

The situation, as it stands, is simple: Argentina owes above a hundred billion dollars to foreign private creditors, and it's offering to pay about 25% of it. Creditors refuse the offer, and there are we, in a stand-off of sorts. But a number of factors complicate this simple picture.

Given his nigh-hegemonic political power, the Argentine position is actually President Kirchner's. Lacking (at least so far) a peronal power structure, he needs internal support and cash (to pay for the social programs) in the short term, and a growing economy in the middle term. Thus, it makes sense for him to keep the IMF/World Bank obligations and offer a very small sum to private creditors: it maximizes surplus resources and internal support (the debt is a _very_ politically charged issue in Argentina) while keeping open the doors for future loans that will finance Argentina's growth beyond the next year. Don't let the rhetoric fool you: it's a _rational_ position, as far as it goes.

Creditors, of course, want as much of their money as they can get. Their actions are based on how much they expect the Argentine government will ultimately be willing or forced to pay. So far, they seem to think that it's going to be around 65% of the debt, although probably via (unprecedented in scope?) judicial procedures that the Argentine government is trying to pre-empt by denying the representative nature of currently engaging groups.

Tthe critical questions shaping the future of the Argentine debt issure are then:

• 
  
• Q1: Could/Will judicial actions asssure payment above the government's offer? If so, creditors are going to get what they want, and Kirchner's is going to be in deep political trouble.
• 
  
• Q2: Could/Will the Argentine offer be used as a precedent in other cases? If so, and judicial measures fail, creditors are never going to accept the 25% offer, as it would drastically slash the value of the global emergent debt portfolio.
• 
  
• Q3: Can Kirchner's internally-generated support and surplus outlast the Argentine bonds and the country's need for investment? If they begin to depreciate quickly enough, judicial actions seem ineffective and the offer is not seen as a too-dangerous precedent, then investors are going to take the goverment's offer, cutting their losses so to speak. On the other hand, if the country begins needing external cash to keep up with demand -for example, if soy prices drop too much, then external financing will be unavoidable, and creditors will force better terms.
  

The answers to these questions will determine, I think, the resolution of this issue, perhaps one of the most critical conflicts going on in the financial world noawadays.

I think your answer to Q3 betrays a couple of erroneous assumptions. Firstly, you can't ever "outlast the Argentine bonds". Once an obligation, always an obligation. The only question is whether you try to restructure that obligation into something which you then start servicing, or whether you leave that obligation in default.

Also, the bonds, far from depreciating, are actually going UP in value. They can fluctuate around the mid-20s, but there's not going to be an enormous amount of value lost from here. Bond investors mark to market: they've already taken their losses, and are now hoping for gains.

And whatever the future holds, external financing is not so much unavoidable as inconceivable. So long as Argentina has court judgments and/or defaulted debt, it's not going to get any new funds. Even after a successful restructuring, there are going to be a lot of holdouts, the Darts will still have their case going in NYC, and I'd be very surprised to see new money being lent to Argentina.

"Don't let the rethoric fool you: it's a _rational_ position, as far as it goes."

rhetoric- sorry
(feel free to delete)

To respond to Felix's comment (and keeping in mind I've ignored the Argentine bond problem since default- it's a terrible "wake me when it's over" attitude, but it's mine):

I think Marcelo's 3rd question can be rephrased better as: "Can Kirchner outlast the Argentine bond crisis?" That is, can his support structure survive without FDI or portfolio funds fueling Argentine GDP growth? Will he be able to fund social welfare programs using cash generated from domestic growth and whatever he can eke out of WB/IMF/IDB?

For the past year the answers seems to have been 'yes'. He's played his hand strongly, and it will be interesting to see what kind of deal he can get out of Wall Street.

And I think I'm a bit more optimistic about future external investment than you are. Once Kirchner & Lavagna make a good faith effort at servicing the (restructured) debt, I think investors will get back in to a market they've done well in the past in. Look at Russia after '98...

Mike, thanks for catching the typo. As for Q3, yes, the critical question is Kirchner's hold on power, which he has taken pains to consolidate.

Can he keep up the pressure (and the country) until the market just gives up on getting more than 25% on these bonds? Quoted values for the bonds seems to indicate that the market overall already did. So who's keeping the game up? My take is holders trying to beat the market (risk-seeking and/hold rightfully angry small holders) and perhaps big players exposed to other emergent markets, afraid that Q2 might be true and this could settle a bad precedent. Precise data on who's pressuring who here would come handy.

And, paraphrasizing Felix, once this issue is settled, what sort of interest rate premiums is Argentina going to have to pay? (his scenario implicates "infinite"). It's a critical question -the most critical, long-term- but it depends on what the endgame actually is.

Anyway, a modification to the model is in order. Besides being rephrased, Q3 needs to include the interest premium on predicted future financing needs as one of the factors pressuring President Kirchner and his political standing.

Marcelo, I think you misunderstand the quoted values of the bonds. If the Nielsen plan goes through, with a 75% haircut and full repudiation of past-due interest, then the net present value of the bonds at an exit yield of, say, 15% would be well into the single digits. The reason the price of the bonds is so high is that bondholders expect a much better deal -- if not from this administration, then from the next one.

And no, lack of market access is not the same as infinite country risk. Just because a country trades at a certain level does not mean it can borrow at that level. Once the swap goes through -- if it goes through -- it will still be a long time before Argentina can start tapping the markets again. (Of course, there will still be trade credit lines, etc.: in fact, they never completely went away.)

"it will still be a long time before Argentina can start tapping the markets again"

This may be true, but maybe the need to do this isn't what it was (thinks just ain't what they used to be).

Going back to what I was saying earlier this week about Chile and China and on Bonobo ( http://bonoboathome.blogspot.com/2004_01_11_bonoboathome_archive.html#107391230520210594 ) about how China is generally sustaining Latin America, important questions are arising about the debt problem.

It seems we have consensus that Kirchner can afford his present strategy coz trade with China is keeping him afloat, and I imagine in the near term they can Walmartise Argentina with Chinese in place of US products.

Secondly, the shift to the knowledge economy means that these huge capex-heavy projects are not so important as they were, India isn't attracting anything like the capital investment China is, yet is going ahead quite nicely.

So what I am trying to say is, may we be seeing the whole playing field shifting before our eyes here. Is the whole IMF programme being transformed not from within, but from with-out?

And couldn't Argentina in the knowledge economy do to Spain and the Spanish speaking population US-side, (and the rest of LA for that matter), what India is doing for the English speaking world. Working from home with a computer and a broadband connection doesn't need an IPO before you can really get going. So this is definitely the direction I would be going in if I were Kirchner.

Equally if all this is on target, we should expect some more 'heavyweight' defaults further down the line, and Kirchner can lose himself in the melee. Now I understand why it is important to spend so much time studying game theory, or now I come to think of it, maybe you could spare yourself the time and expense by browsing Roberto Arlt's 'Siete Hombres Locos'first.

Congratulations, Edward, would you like to be the 2,000th person to think about setting up a call center in Argentina? Turns out Central America is still a lot cheaper for that sort of thing. And as for software, even Uruguay exports more than Argentina. Like it or not, Argentina is a commodities-based country, and commidity exports are going to make or break its economic growth. Service-economy bullishness is all well and good, but it's only going to have marginal effect, I'm' afraid, even on the most positive of outlooks.

If you really care about the knowledge economy, have a look at the number of years of education that the average Argentine has. Not the BA elite, but the average Argentine. And then compare that to, say, Thailand.

There's an interesting follow-up/summary of this dilemma on the front of today's WSJ. It covers much of the same ground, from the point of view of individual pension investors in Italy, rather than institutional investors in the US.

The article suggests that Argentina has an "ace in the hole" in the $130bn held by Argentines overseas, and that Lavagna hopes some of this will be drawn on to fund growth.

I doubt it. Most of that is being kept overseas by Argentines precisely to keep it out of Argentina and any economic chaos (or confiscations) there. What of that amount was needed to tide wealthy Argentines over during the crisis has already been drawn on (this was seen in the "massive" (by Uy standards) withdrawls on Uruguayan banks that brought the crisis to Uruguay).

So funds squirreled away overseas are out. As Felix pointed out, growth through the development of an off-shore service industry is out. With massive subsidies to American and European farmers, agricultural-export-led growth is out. Can you sustain an economy on niche products like upmarket wine and free-range beef? And can Kirchner solve his bond problem before he has to face these facts?

"setting up a call center in Argentina"

No Felix, I am *not* suggesting this.

Even in the case of India I think the call centres should go out to cheaper outsourers.

No, I am talking about knowledge economy. And the comparison isn't valid with Thailand, Asia may have far higher educational levels. I am comparing with Spain and other LA countries. Argentina definitely can enter the Spanish market culturally. Cinema and Literature have been demonstrating this clearly recently. So why not publishing generally. Especially the electronic version.

And check out the number of web domains per capita in Argentina before the dot-com crash. One of the highest in the planet. No there is definitely talent there outside football. What Argentina needs to do is leverage this.

I think you are rerunning the India argument, because there are only 30 million highly educated people and 700 million in misery in agriculture, these 30 million cannot carry the rest, right.

Sorry, I don't agree. Critical mass, and strategic thinking are decisisive here. Agriculture can simply generate some cash for higher end value projects. Of course the Argentinian middle classes have to get their act together, but if they do, they can do it. Spain is a total new-economy backwater ripe for the taking - and of course if Argentina thinks clever it can use Spain as a platform for getting into the EU like India is entering the EU via Bulgaria and Eastern Europe.

This proposal if very different from what Villalonga and the 'boys in Miami' - ya.com, Terra-Lycos (the old new economy set) - have in mind.

Sorry, but that's what I think.

Do give books - religious or otherwise - for Christmas. They're never fattening, seldom sinful, and permanently personal.

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