Stressed Banks To Forgive Defaulter

Sydney Morning Herald

Monday October 6, 2008

Richard Reynolds

A deal with the pariah, Argentina, now seems the lesser evil, writes Richard Reynolds in Buenos Aires

IT IS a happy financial marriage, but one made in hell. Three banks made utterly desperate by the credit crisis meet an equally desperate government and unexpectedly hatch a plan to solve one of the world's worst and oldest debt crises.

It involves Argentina, which provoked the world's biggest banking default in 2005, and three of the world's biggest banks: Citigroup, Deutche Bank and Barclays. All three are desperate to revive their ravaged balance sheets.

And Argentina itself is in only slightly better shape. It faces an enormous bill of $US14 billion ($18 billion) next year just to service its still outstanding debt - a sum it could meet, but only with some effort and luck.

Also, its 2005 default means it has been frozen out of international capital markets, with multibillion-dollar lawsuits hanging over its head in the US and Europe. This translates into staggeringly high (up to 15 per cent) interest rates on the debt it has issued since the default.

Both sides needed to deal. And after months of ignoring each other's phone calls, suddenly, and to nearly everyone's surprise, the two sworn enemies are talking. And they both sound desperate.

According to the Argentine Government, the two sides began formal talks a week or so back. The banks, perhaps embarrassed by their climbdown, are not talking about the details, but tacitly acknowledge the embrace.

In 2005 Argentina's then-president Nestor Kirchner told the International Monetary Fund and the world's financial community where to go. Perhaps, without surprise (at the time), some of the world's bankers tried to tell Argentina - the long-time poster child for out-of-control sovereign debt - who was actually in charge.

And perhaps they were, for a time. Then came the credit crunch.

After the South American nation defaulted in 2005 on nearly $US100 billion worth of debt (the biggest default ever), a handful of international banks (mostly representing small debt holders, such as Italian pensioners) said they would "never" take Argentina's offer of 65c to 70c in the dollar. While many did settle, the three major banks refused - representing about $US14 billion in outstanding debt - now worth nearly $US18 billion, after interest.

Today, just three years on, they are back begging, prepared to take even less than originally offered to move these enormous non-performing loans into the performing column and hence smarten up balance sheets made red by poor investments. And earn some fees along the way.

While the details remain to be worked out, the deal being touted in the Argentine media involves the banks taking a bath and losing face: accepting about 60c in the dollar on the outstanding debt, plus providing up to $US1 billion in fresh cash upfront for Argentina.

"The banks realised their hand wasn't quite as strong as they thought it was," says Mark Weisbrot, at the US think tank Centre for Economic and Policy Research. "After three years, these hold-out bond holders are realising that they really aren't having any impact on the Argentine economy.

"It was time for them to give in," he added.

The three banks all refused to comment on the news, which was first delivered by Sergio Massa, Argentina's rough equivalent of a chief of staff in the US White House. He insisted that the banks had "approached the Government, not the other way around". An essential face-saving point, since the Argentine Congress had actually outlawed the Government approaching the banks in 2006.

While nobody seemed to know the precise motives of the three banks nor the reasons for their stunning volte-face, nearly all banking analysts presumed their bruised balance sheets were primarily responsible for the climbdown. "The idea of making $US300 million to $US400 million in banking fees right now is awfully attractive," said Alberto Bernal-Leon, at Bulltick Capital Markets in Miami. "Most of this debt is in others people's hands, and they stand to make big fees for negotiating a settlement."

In addition, the banks have their own exposures to these debts. None of the three banks would provide details last week; only Barclay's politely returned calls, but still tip-toed around the issues.

The overall exposure is likely to be in the range of hundreds of millions of dollars, perhaps as high as $US1 billion for each of the three giant banks, according to analysts.

Perhaps it was chump change just 12 months ago for institutions with assets in the hundreds of billions of dollars range, but if the banks could manage to "shift these debts" from non-performing (read worthless) to performing and then treat these debts as class-A sovereign debt, it would certainly help them "polish up balance sheets tarnished by billions in miserable investments" in dubious investment vehicles, according to Stephen Timewell, the editor of London's The Banker magazine.

"It seems like a perfectly plausible explanation," for the discussions, he said.

© 2008 Sydney Morning Herald

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