This posting will be a short and fairly idiosyncratic note on Argentina’s debt management. Nothing more than that, maybe less…

According to an article yesterday in Ambito Financiero, the Argentine government is about to get going on its financing needs for 2009. Apparently, a swap of ‘prestamos garantizados’ (PGs) for local debt linked to floating rate Badlar is being negotiated quietly with local banks. It seems it will be announced as a fait accompli once there is an agreement, as opposed to announcing a swap for holders of short-term debt to participate in. This sends a few signals that are interesting to interpret (assuming that article is a fairly accurate representation of what is being worked on).

1- Basic approach to debt: Argentina has effectively no capital markets access (inverted curve with yields in the 20-45% range), non-trivial short-end maturities (all local debt, only small interest payments of ‘external debt’). In that scenario, a Secretary of Financing who is not capable of affecting the overall direction of economic policy towards clearer market principles and rules, has basically three options to choose from: a) work with the hand it has been dealt with and alleviate the financial program in any way he can while minimizing the costs; b) resign; and, c) default. It is clear the current team has decided for (a). Ironies aside, it seems clear the Kirchners are trying to stay away from an explicit clear default on external debt, though they have and continue to implicitly restructure local debt (inflation data, etc.). Though it is difficult to appreciate, the Kirchners do not seem to have the preferences nor the temptations that Ecuador’s Correa has shown since he campaigned for office. Some lessons have been learnt since 2002. Not many, but some.

2- The new cash mostly intra-government: The nationalization of the pension system has given the government more degrees of freedom in the short term, and that will be most likely be the only source of any fresh cash, together with other intra-governmental transactions. Market debt will be dealt with different types of liability management exercises, if they can be labeled that way.

3- Method to roll-over debt: This government seems to prefer to quietly negotiate with locals first. Apparently Boden12s are excluded from this first step. Most likely the reason is that any deal with Boden12 holders would render itself for a clear analysis of the costs paid to roll over such a large payment, which is significant given the shape of the curve and the additional value of Boden12s’ liquidity. So, my interpretation is that the government will agree with local holders of PGs first, maybe later allow foreign holders of PGs to take the same terms, which would be accepted by some if that provides a reasonable road to USD offshore (here reasonable means ‘better than hitting the most likely inexistent bids on those instrument offshore’). Then deal with other large maturities, specifically Boden12s.

4- Characterization of the strategy: Recent Argentine economic history shows that it is difficult to find a strategy where there is none. But if I had to characterize what we are bound to see from Argentina’s debt tribulations, it would be something like this. First, deal with the most pressing payments (i.e. next ones). Of those, deal with locals first, especially on instruments without market prices or clear expression of cost to rollover. If foreigners can be paid off not to deal with those institutions, pay them (clearly the case of small interest payments on Pars and Discounts). If it becomes unavoidable to pay a steep price to roll-over a significant maturity, they will do it instead of facing a clear label of default. If the size is not significant, it would be paid off. The risk here is on USD debt in local law. There could be a point in which the reputational cost of paying those in ARS is lower than paying with USD or an outright default. Basically, local law opens the door to an intensive use of imagination.

Thus, I would expect many of this local pre-negotiated deals, intra-government transfers, pension system money, and when there is no other option a few market swaps. The latter is likely the case of Boden12s. The August amortization and coupon payment is still a medium-term issue, but its shear size will most likely push the government to try some kind of swap which will explicitly show the steep costs of dealing with a curve that is pricing a fairly imminent default. But remember, Boden12 is a local instrument, which means litigation is not a realistic option. Not that external debt litigation has provided much results…

Finally, where does that leave holdouts? There is no economic reason for dealing with those unless there is a more comprehensive strategy to improve economic policy and regain market access. There could be political reasons (i.e. foreign policy). Thus, I would not venture to predict any realistic attempt on that side.