'Green' plan aims to consign Argentina's debt woes to history

By Jude Webber in Buenos Aires Published: March 18 2009 02:00 Last updated: March 18 2009 02:00 When Argentina announced last September that it was studying a proposal that could close the chapter on its $95bn (£68bn) 2001 debt default and regain access to the capital markets that have been closed to it for seven years, investors were delighted. The proposal aimed to settle with the investors who held out against the terms of the 2005 debt swap, which was accepted by the majority of bondholders hit by the 2001 default. Legal action by these so-called hold-outs has barred Argentina from capital markets since then because any funds raised could be seized to pay back the hold-outs. However the plan, which President Cristina Fernández said had been submitted to the government by Citigroup, Deutsche Bank and Barclays, fell victim to the financial trauma created by collapse of Lehman Brothers. But Argentina's financial isolation is making it hard for it to meet its debt obligations and some economists fear it could be heading for a new default next year. So pressure is again intensifying on the country to settle with holders of defaulted debt, who are now owed $29bn including interest.The government has begun "reaching out" to some of the hold-outs to discuss a deal, according to one New York lawyer familiar with the situation. But officials would like hold-outs to put up fresh funds as well as swap their worthless debt - a tall order in the current climate. Now, an Argentine lawyer representing some hold-outs engaged in New York class-action suits, who have been awarded $2.2bn in court verdicts that Argentina has not paid, has come up with an alternative plan he says could go a long way to settling the issue. The lawyer, Pablo Giancaterino, told the Financial Times that his plan - backed by US law firms Proskauer Rose and Sirota & Sirota, as well as Guillermo Gleizer, another Argentine lawyer - was an innovative way both of settling litigation and generating investment. He proposes creating a trust into which hold-outs would deposit the verdicts won against Argentina, in essence "freezing" them, but leaving them as a guarantee that they could be executed if Argentina defaulted on the new deal. The trust would issue investors with certificates of participation tradable in New York. Argentina would receive the old bonds and all it would pay would be interest, with a 66 per cent so-called "haircut" on the original capital, similar to the 2005 swap that hold-outs rejected as too cheap. Interest would be paid into the trust, which would be obliged to invest the funds in tax-free energy and infrastructure projects for 11 years. Those investments would generate returns to pay back the hold-outs without them having to accept a haircut. "It would be the first time that a developing country has used interest payments on its debt to generate investment," Mr Giancaterino said. He said the offer "could be extended to all hold-outs", including large funds pursuing individual litigation, which are owed some $2bn. Even with just the participation of the class action hold-outs, Mr Giancaterino estimates that $1.1bn could be poured into green energy projects in a decade. He thinks a conventional bond swap on the same or worse terms as in 2005 would imply annual interest payments of $600m alone. "The 2005 swap had the biggest writedown in history. Less than four years on, the debt problem remains. This is proof that conventional swaps aren't the answer," he says. Enrique Nolting, an independent investor now retired who lost $2.5m in the default and considered the 2005 offer a slap in the face, said Mr Giancaterino's plan offered "a magnificent way out" for Argentina. "I'm no vulture fund. I bought my bonds at proper market prices with money I made working all my life. They ruined me," he said. "I've only got a certain amount of life left and I want to get paid. This looks beneficial for both sides." The New York lawyer familiar with the hold-outs was not so sure. "It's incredibly complicated and hard to value." The government is keeping all options open. One senior official said: "We don't rule anything out. We'll evaluate this with the proposal that other bondholders have brought to us."