Problems seen with new Argentine debt payment law

Staff Writer
Columbus CEO

BUENOS AIRES, Argentina (AP) — A law designed to restructure Argentina's debt and sidestep a U.S. court ruling that pushed the government into default could be difficult to apply and worsen the country's frail economy, analysts say.

Argentina's congress approved the bill early Thursday and President Cristina Fernandez formally enacted it later in the day, calling it a "historic event."

The law would let Argentina pay bondholders locally to skirt the U.S. financial system, which is bound by a U.S. court order restricting the South American country's repayments. The measure also allows creditors abroad to exchange their bonds for new ones not bound by U.S. rules, and it encourages investors to move their Argentine debt from the U.S. to Argentina or France through a debt swap.

The law was backed by governing party lawmakers, but criticized by the opposition and several economic analysts.

"This law will have many difficulties in being applied effectively," said Matias Carugati of the Buenos Aires-based Management & Fit consultancy. "It will be up to the bondholders, who will have to change the jurisdiction of their debt from the U.S. to Argentina or France."

Dante Sica, of the consultancy, said it will be difficult for some bondholders to act under part of the law that lets a unit of Argentina's Banco Nacion replace the Bank of New York Mellon as the agent for payments. Sica said there are several "institutional funds that would have legal problems" in accepting this.

The change comes at a time when Argentina's economy is in recession and is struggling with spiraling inflation.

Argentina settled most of its creditors after its 2001 default by trading lower-value bonds for defaulted debt. But a group of holdouts refused to accept that deal and seeks about $1.5 billion.

A U.S. district judge ruled earlier this year that Argentina could not pay the other creditors until it settled with the holdouts. The government argues it cannot settle with the holdouts without offering similar terms to the other bondholders, and it went into default when it couldn't use the U.S. bank to pay $539 million in interest due by July 30.

Argentina's next debt deadline is Sept. 30, when the country must pay some $200 million, and the government could default again, analysts said.

But not all economists think the new plan will fail.

Economist Fernanda Vallejos said the measure could help solve the problem, including with the holdout bondholders that the government calls "vultures."

"Argentina has always shown its willingness to regularize the situation with 100 percent of the bondholders, and this is clear in this law because it also includes the 7 percent who rejected previous debt swaps," she said. "Argentina also has the will to resolve with them, but always under the principles of equality, justice and respect."

Other analysts warned that the unit of Argentina's Banco Nacion lacks the requirements to be a conduit for payments because it doesn't have a working branch in New York. Others say the law is unclear on how it would pay bondholders.

"It doesn't clarify how the payment of the bonds would work under the Argentine or French jurisdiction," said Fausto Spotorno of Orlando Ferreres & Asociados consulting firm. "It doesn't favor Argentina's image and it could deepen the economic recession."