Argentina's Bond Swap Is Moved to Back Burner; U.S. Officials Are Focused On Reviving Economy At Home After Attacks
By Pamela Druckerman, 10/08/2001 The Wall Street Journal

NEW YORK -- A much-awaited bond swap that was supposed to relieve part of Argentina's massive government debt appears to have been put on the back burner in the wake of the U.S. terrorist attacks.

Although the swap wasn't expected for several months, bondholders say the flurry of activity aimed at laying the groundwork for the operation has ceased in the wake of the Sept. 11 attacks. Economists say U.S. Treasury officials, who came up with the idea of a debt swap several months ago, are tied up with efforts to revive the U.S. economy and might not focus again on Argentina for some time.

Argentina has already lined up financing to cover payments on its roughly $130 billion public debt through the middle of next year. But because the country's economy isn't growing, economists and investors say, the only way the government can avoid eventually defaulting is by trimming its total debt load through an operation like a debt swap.

Adding to pressure to improve the country's debt profile is nervousness ahead of legislative elections on Sunday. The average interest rate on Argentina's foreign debt has surged to its highest level in more than six years, on concern that support for President Fernando de la Rua's economic-reform plans will erode. A higher interest rate means the bonds are perceived as riskier.

Plans for a swap were set in motion in August, when the International Monetary Fund said it would speed up disbursement of up to $3 billion in fresh loans for Argentina if the government and its creditors agreed on a debt operation. That stipulation came at the insistence of the U.S. Treasury Department, which was reluctant to back fresh IMF loans without assurance that Argentina could pay its debts over the longer term.

Top officials at Argentina's finance ministry didn't return calls seeking comment. IMF spokesman Francisco Baker said Friday that the U.S. Treasury Department, rather than the IMF, is coordinating the swap operation. "We are waiting for the parties involved to reach agreement," Mr. Baker said.

But in a press briefing last week, U.S. Treasury Undersecretary John Taylor said it's up to the IMF and Argentine officials to pick the best way forward. He wouldn't say whether the U.S. would support additional IMF loans for Argentina, adding that right now the matter is "hypothetical." He added that there has been "a lot of discussion, proposals and ideas" on Argentina.

U.S. and other foreign bondholders have said they won't agree to lose any money on the deal. In the weeks leading up to the U.S. attacks, Argentine officials were studying ways to entice bondholders to participate by using the $3 billion as collateral for new bonds, or by simply buying back some government debt.

Economists say that for the swap to actually reduce the total amount of Argentine debt, the country will need substantially more than the $3 billion pledged by the IMF. Roger Scher of Fitch Ratings Inc. calculates that Argentina needs at least another $5 billion in loans in order to craft a swap attractive to foreign creditors. Argentina had been expected to lobby for additional funding from other multilateral lenders, like the Inter-American Development Bank.


  1. In the case of a corporation that wanted to reduce its debt load, it would swap equity for currently outstanding debt.  Explain why Argentina cannot do this?  Or could it?  Find out what sort of debt swap Argentina has in mind.
  2. Assuming the debt swap isn't a equity-for-debt swap, how could any debt-for-debt swap actually reduce the amount of debt, if participation in the swap is voluntary?
  3. Might it be in the interest of bondholders to actually forgive some of Argentina's loans?  Explain the prisoner's dilemma involved here; i.e. would it make sense for each bondholder to forgive debt independent of what other bondholders did?  How might the dilemma be avoided?
  4. What sort of liability restructuring could a corporation do, if its debt-to-value ratio became too large, other than an equity-for-debt swap?  Are any of these feasible for the Argentine government?