Argentina has launched a debt swap to end its financial pariah status. Its success will depend on the reaction of small creditors, writes Hisham El-Naggar from Buenos Aires On 14 January, Argentina put on a happy face and announced to the world that it was ready at last to emerge from the default it had declared with an emphatic air three years earlier. Things have not gone badly for Argentina since then. Despite gloomy prophecies that the country was finished and that it had ceased to exist as far as international financial markets were concerned, Argentina astonished everyone, notably itself, by undergoing a remarkably rapid recovery. And it accomplished this without an International Monetary Fund (IMF) rescue package or even a programme, with minimal capital flows from the rest of the world, and despite devastating attacks from international financial publications advising adjustment-weary Argentina to pay up. Now Argentina says it is ready. Struggling to suppress its grin and unabashedly self-congratulatory that it had, in the space of three years, returned to pre-crisis production levels and often surpassed them precisely by ignoring international pundits, the Argentine government has made the formal offer of a debt swap to all holders of its non-performing bonds. The catch: the swap implies substantial capital forgiveness, amounting to about two-thirds of the debt -- a hefty percentage which exceeds what previous defaulting countries got away with in recent years. The Argentine government reminded its angry creditors that they had gambled on near-junk bonds -- offering dazzling returns on paper -- and lost. The debtor suffered a breakdown which amounts to bankruptcy. When that happens, you do lose part of your capital. Not all bondholders are reacting in the same fashion. Although it is too early to pass judgement on a process that is supposed to continue until the end of February, Argentina's creditors appear to fit into three different groups. First, we have local institutional investors, pension funds and insurance companies, who seem to be opting en masse for the debt swap that is on the table. Second, the small investors who are finding it hard to assume their losses, and whose "representatives" are making noises about going to court. And third, some big investors, the owners of "vulture funds" who bought Argentine debt at bargain basement prices -- hoping to make a killing in record time. They appear inclined to wait until the last minute. Wait for what? For one thing, they will want to know what the others are doing. If, as Roberto Lavagna, Argentina's minister of economics, claims, Argentina can count on a minimum 50 per cent acceptance on the part of creditors more or less already in the bag, it is mostly the small investors who will decide whether that percentage can be raised to above 70 per cent -- a key psychological barrier. If come mid-February there are indications that they are tempted to accept the offer, many think bigger investors will conclude they cannot block the debt swap and will jump on the bandwagon willy-nilly. It is the small investors who have been particularly hard hit by Argentina's default. This is especially the case in Italy, where some 450,000 individuals, many of them pensioners on limited incomes, let themselves be dazzled by the dazzling returns Argentine bonds were offering. For them, the three dry years since default was declared have represented real hardship. Lavagna is gambling on the fact that they, and most international banks who advised them, are tired of waiting and will settle for something to avoid losing all. For what is the alternative they have? Going to court, and insisting in international financial circles that Argentina has done them wrong, that the country can pay a lot more than it is offering, and that defaulting countries should not be able to get away with it. This might produce some result if international financial circles had something like a soul. And lawsuits? Those attempted thus far by impatient investors have yielded exactly nothing. Even where favourable sentences have been won, the Argentine government simply has no important assets overseas that can be seized. The most disaffected investors can hope to achieve is threaten to block the swap in court. Their so-called representatives insist that they can do so if they stand united. That, they argue, would force the Argentine government to improve its offer. But investors from different countries, with different profiles and different attitudes to what lawyers can do for them are more likely to split than not. Some will prefer to accept the Argentine proposal rather than wait for some vaguely defined international pressure to force the Argentines to budge. But if Argentina does get away with it in the end, would it be fair? The G20, which includes the wealthiest countries in addition to a number of large, middle-income ones of which incidentally Egypt is one, have openly grumbled about the lack of transparency which characterised Argentina's dealings with its creditors. They may have a point, but beleaguered countries negotiating to get out of default are not likely to show their cards up front. Besides, public opinion in Argentina is largely unsympathetic to the creditors' plight. It was they, after all, who lent the money which permitted the country's debt to balloon without really caring about its ability to repay. And it was Argentina which suffered a crisis as a result; if it is now emerging from that crisis, the rest of the world deserves little thanks for it. And if the rest of the world pronounces the operation a failure, as may happen if less than 70 per cent go for it, perhaps Argentina would better its offer? But then again, perhaps not. After all, no offer will make all creditors happy. Argentina may decide it will have to do without the world for a few more years. It was forced to do so for three years, and the results have not been bad.
