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Argentina Bond Swap*

May 25, 2001
Argentina Formalizes Bond-Swap Plan,
Extends Offer to Holders of $66.7 Billion

BUENOS AIRES -- Argentina's government made its formal offer for a giant bond swap, part of its effort to gain breathing room while it tries to fix the economy.

Rather than excluding certain bonds, as some investors had expected, the government extended its offer to holders of virtually all of the country's publicly traded dollar or peso-denominated debt, which totals about $66.7 billion.

The amount of debt actually tendered in the exchange won't be known until June 4, when the government plans to announce the final tally. That is a critical figure for investors, who want to know exactly how much less Argentina will spend on debt payments in the next few years as it struggles to exit from a three-year recession.

Economists believe that about 44% of debt eligible for the swap is held outside Argentina, while the remainder is mostly in the hands of Argentine banks and pension funds. They estimate that around $20 billion in bonds will be tendered, with locals accounting for much of the total.

Argentine Finance Secretary Daniel Marx estimated that the swap could postpone some $4.5 billion in debt payments for the remainder of this year and another $4.7 billion in 2002, based on what the government and its bankers know about market conditions. Overall, he said the government could save a total of $17 billion over the next five years.

Argentina's benchmark bond rallied about 1.3% Thursday, in an early sign that there is at least some optimism about the exchange. But traders expect markets to be choppy in coming weeks, as investors scour the economic landscape for signs that Argentina will soon grow fast enough to pay its bills down the road.

George Estes, analyst at a Boston investment firm that manages about $1.2 billion in emerging-market bonds, said his company will probably submit an offer to exchange at least some of its Argentine debt. But he stressed that he is "hopeful rather than optimistic" about the success of the country's economic reforms. "It's too soon to say, 'yeah, everything's OK now,' '' said Mr. Estes of Grantham Mayo Van Otterloo & Co.

One New York fund manager said it has become increasingly expensive to bet that Argentina's bonds are going to lose value, a process known in Wall Street parlance as "shorting." That means that the "shorts" are in high demand. "There is definitely a camp out there who doesn't think this is going to succeed and is willing to pay up to stay short," he said.

Argentine Economy Minister Domingo Cavallo will spend much of next week trying to convince foreign investors that his barrage of tax measures and spending cuts will succeed. He plans to travel to Madrid and London on Monday and Tuesday, and then spend Wednesday in New York.

As expected, Argentina said it will offer one of four new bonds in exchange for several dozen types of existing debt. The biggest portion, some $36.3 billion, would be due in 2008, while the others have maturities stretching out to 2031.

Next Friday, the government will give the exact price and yield that these new bonds will carry. Also, holders of eligible bonds will tell the government how many of their old bonds they are willing to exchange for each new one. Government officials will then huddle with bankers over the weekend to decide which offers to accept.

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