Argentina Seeks To Emerge From Default With Debt Swap

Argentina is seeking to change the jurisdiction of its foreign-law bonds to emerge from a second debt default in 13 years, but analysts warn that the plan could backfire.

President Cristina Fernandez de Kirchner announced the plans for a debt swap Tuesday, saying that bondholders can opt to exchange their foreign-law Argentine bonds for new securities under local jurisdiction that would be paid out of an Argentine bank.

This would sidestep a U.S. court order preventing the country from paying many of its foreign-law bonds via the Bank of New York Mellon.

The ruling requires the country to pay creditors who won a lawsuit to get paid back in full on bonds left over from a 2001 default on $100 billion – a legal muddle that led the country to miss a $539 million interest payment in July.

The proposed swap is the latest twist in a conflict that has become a confusing sparing match between government officials, foreign creditors and a U.S. judge. It is a conflict that also has left much of the population and many observers boggled about what is going on.

The president has reduced the battle to one of patriotism, saying it's either the homeland, or the creditors whom she describes as vultures out to feed on the country's demise.

This notion of the battle is winning local support. A recent national survey by the Center of Public Opinion Studies found that 62 percent of those polled believe that the government is negotiating the debt crisis well and responsibly.

But the fervor may not last as the debt crisis slows foreign investment and accelerates inflation that is already running at and annual rate of 35 percent, said Carlos Germano, a political analyst at his consultancy, Carlos Germano and Associates.

"Opinins will turn against the government when jobs and consumer spending power start to decline," he said.

Even so, the government appears unbending in its efforts to get congressional approval for the new swap, with Fernandez de Kirchner saying late Wednesday in a televised press conference that this will remove "an illegal and illegitimate obstruction" for paying its debts.

Deputy Economy Minister Emanuel Alvarez Agis said Thursday on Radio Del Plata that by getting back on track with debt payments, Argentina will avoid more lawsuits stemming from further defaults.

With the next debt payments are due at the end of September, October and December at a total of more than $1.2 billion, it could trigger an avalanche of demands from creditors for immediate repayment of all their bonds, even those maturing in 2033.

Not all are so certain, however, that the debt swap will be successful.

Enrique Szewach, an independent economist in Buenos Aires said on Radio Mitre that the debt exchange will only "bring more vulture funds" and saddle the country in more lawsuits and a tougher time in emerging from a recession that started this year.

"Instead of reducing the problem," he said, the swap "will worsen it."

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