As I said in my introductory newsletter issue (before switching to a blog format), traveling and spending time with the family is an integral part of this unemployment spell. This implies spending a few weeks in Argentina, which makes it difficult to avoid the local papers. I hope to return to non-Argentine issues in my next posting.

Today’s Clarin has 2 articles about the potentially renewed efforts by the government to recover market access. According to that newspaper, public officials told them the exchange of short-term local debt is still on the works and could even happen this week. Moreover, the re-opening of the exchange for still defaulted debt is also alive, and a filing to the SEC has already been made. I just checked the SEC site, and the last thing Argentina presented was its regular 18K in October. But who knows, maybe the SEC is less efficient than Clarin…

A few brief comments can be made off-the-cuff on a BA Sunday night. First, the government’s willingness to produce market-friendly policies is akin a 2-year-old consistency in complying with British table manners (or at least my 2-year-old…). Secondly, current market prices require more than outside-the-box thinking for portions of the intended exchange. Finally, are exchanges of debt enough to regain market access, especially in this environment? If not, how would they pay for the recently announced middle-class give-aways (car loans, lower income taxes, etc).

Complying with today’s market conditions for such debt swaps (if it was at all possible) is consistent with the nationalization of the pension system, in terms of the effect in the government’s inter-temporal budget constraint. I will elaborate below, but basically I mean to say that this apparent initiative by the government leads to a large increase in long term debt to comply with short-term obligations, in a way that severely deteriorates the medium-term payment capacity of the government.

On policy orientation and development, I have to confess to be puzzled by the changes in the last 11 months. Soon after being elected, president C.Kirchner showed there was no grand plan to converge to the center and try to improve the credibility of policy and institutions, but quite the opposite. After severe deterioration in market perception/access/prices, a new market-friendly tack appeared to be in the works, a new Chief of Staff who announced to pay the Paris Club and then to re-open the exchange. As those announcements produced insufficient improvement on their own, policy appeared to have changed tack. So came the nationalization of the pension system. A new NK-in-command era seemed in the works, where there was no need to comply with market principles. Now, this Clarin article today seems to indicate that market access is again up in the agenda. Maybe giving car loans and lowering taxes to the middle class requires funding, and why not, let us try to use the markets… A pop in the market on Monday cannot be ruled out, but we have already seen attempts to regain market access. There seems to be an obstacle to understanding what it is really needed to receive the graces of international markets, especially these days. I think the wait-and-see option is yet again the most valuable trading strategy (unless you still own what pops…).

A not-so Short Comment on Some Details

One of the most important pieces of news in those articles is that one of those anonymous officials said they are modifying the details of those potential deals to the current market reality. I interpret that to mean that they would not expect people to tender their holdings in exchange for less valuable performing debt securities, as it would be the case under the previously transpired details and current market prices. I would expect Argentina to first try to swap PGs (prestamos garantizados) and Boden ’12s in exchange for USD Discounts, and then try to re-open the exchange.

Why? Only because I think that increases the probability of getting something done, especially “something” that would alleviate 2009 cash-flows. PG holders would prefer a traded security to their incredibly illiquid PGs (especially if the security is now in USD and under G7 jurisdiction).

The article had the apparently wrong statement that a swap would happen 1-to-1. How can that be, if Boden’12s have amortized have the issue, amortize another chunk in August, and end up maturing in Aug’2012, while Discos are 2033 bonds that have capitalized some interest already? Well, Boden’12s closed Friday roughly around 26 dollars per 100 of original face (all-in dirty price), while USD Discos closed almost at USD 30 (which means an all-in dirty price of 39.3). In terms of yield, Boden’12s yield 42% while USD Discos 26%. What do markets require to extend duration 3 times? Well, conceptually it seems that almost a duplication of principal!! Imagine Argentina would and could swap out of all Boden’12s in that fashion, all at once (very audacious assumptions on both sides), then debt would increase by about USD 12 bi. So, even though debt prices are in the 17-30 dollar range, and reserves are still plentiful, it seems the thought process is not to buy back debt but to increase the stock… This is consistent with the nationalization of the pension system, in terms of its impact in the inter-temporal budget constraint. Higher long-term liabilities to fend off current obligations (debt payments). Do I need to clarify that this is unlikely to happen? Just in case.

Why would a holder of Boden’12s tender in exchange for USD Discos? As always, it depends on price. On top of the seemingly stupid discussion of the previous paragraph, the top dimensions to play along are the benefit of G7-jurisdiction of Discos and the impending payment of Boden’12s.

Basically, if you believe that default on local debt over the next 8 months is a real possibility (not getting the August amortization payment), then Boden’12s are the most expensive bond in the curve trading at 50cents on the dollar when most other bonds trade at about 30 cents on the dollar (Pars at 17). But if you believe the August amortization will not be missed (or not to be paid in kind or pesos at some Moreno-type exchange rate), then Boden’12s are cheap and almost like a call option on Argentina’s willingness/capacity to pay beyond 2009.

Quickly on a re-opening: Friday’s closing prices mean that to respect the previous exchange’s prospectus, the government would be offering roughly USD 15 worth of USD Discos for the still defaulted debt. What else can they drop in the basket and still comply with the same USD Discos’ prospectus?

In sum, if that article today is a fair representation of the current thought process around the Pink House, the renewed effort to regain market access indicates the government is willing to push the philosophy of the Pension Funds’ nationalization to a new level. In other words, increase future liabilities at any price, if that helps to travel through the present without a major hiccup. Issuing USD Discos now conceptually means issuing at 26%. Again, this seems to be for now a trial balloon, difficult to validate in relevant sizes by markets.

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