G.BREUER
Since 1869
www.gbreuer.com.ar
GB Newsletter
February 2005
This
summer, filled with tourists on the seaside resorts of Argentina and
Uruguay (in particular Europeans thanks to the historical increase in
value of the Euro), news of
greater interest for those who follow the country’s news from abroad
are concentrated mainly in the advance of the Argentine re-negotiation
of its sovereign debt with private creditors and in the relationship
with the financial world (in particular the IMF and the G7 group of
countries) after the much awaited closing of the debt swap of default
bonds. The debt swap is expected to close February 25.
On
the other hand, the economic news of the country continue to be
favorable, due to the overall excellent internal management – visible,
among other factors, through the continuing fulfillment of the tax
surplus-, as much as for the favorable environment abroad– still
high prices in commodities and low interest rates.
But
in the opinion of many, the reinsertion of Argentina in the world
upon exit from default will depend on many and varied factors, some of
which are mentioned below.
Among
them, as said, we find Argentina’s resolution of its prolonged
default. In order to have any idea of
the possibility of a default resolution, it is necessary to wait
until the February 25th , date on which the swap expires. The
success or failure of the re-negotiation of the public debt will depend
in the first place on the percentage of acceptance of the three
different types of bonds that are offered in exchange for the defaulted
ones – that today appears to be closer to a final figure that is
higher than what was expected previously: perhaps even 70%. This result,
a few weeks ago, seemed unimaginable.
The
reasons of the favorable expectations, of course, are not due to the
satisfaction of those willing to accept the debt swap with the terms of
the exchange offer: Argentina, in the opinion of some, should not
reasonably offer anything better than what it is offering, given the
risk of once again defaulting. Also, in the opinion of others –many of
them, forced to accept, it may be very difficult to obtain a larger
payment by means of the judicial system, especially in the case of
retail bondholders. For one reason or another, therefore, an acceptance
of this rather poor and low offer is expected. It should also be kept in
mind, that it is the opinion of prestigious economists that despite the
low offer made to the creditors, the magnitude of the new debt would
demand strong savings and huge fiscal discipline in the future,
something that generally make weak democracies feel not enough at ease.
It
can not be denied that the success of the swap will also depend on the
situation in which the creditors who do not accept the swap will be
left, the pressures that can be exerted by them and the lawsuits that
may be filed or continued. It is enough to think that if creditors
representing 70% of the principal and interests in default adhere to the
exchange, approximately 1.5 times the actual reserves of the Central
Bank (that as a result of a good monetary policy have reached a level
similar to the best years of the Argentine convertibility), that
is to say close to 30 billion dollars –obviously a very important
figure-, would remain in the hands of the damaged creditors seeking
court judgments. And nobody should opt out of the swap without having
clear that the only place to go with the defaulted bonds is the courts.
In
this respect, it can not be avoided that the recent approval of a law
(26.017) that on Wednesday, February 2nd, the government sent
to Congress, by means of which the reopening of the debt swap after its
expiration will be prohibited to the Executive Branch, this, in order to
pressure the undecided creditors to accept the offer. Although a
negative message, the law, finally passed on February 9, is proving to
be a convincing means for bondholders to sell their bonds to an
increasing number of banks that for sure are not to hold out.
In
short, what this law achieves is the prohibition of the Executive branch
to reopen or improve the bond swap offer without congressional
intervention. It is certainly not common for this to happen in
Argentina, since such law cannot be seen as anything but pressure for a
higher number of bondholders to accept the terms of the swap, although
it is taken for granted that if for any reason there is an improvement
in the offer, the law would be amended immediately.
Advisors
for bondholders believe that the law is not valid. We believe the same
since despite its text, if the level of acceptance is very low,
Argentina would be under financial and political pressure to negotiate
an improvement, which is still expected by many.
In
our opinion, it is an unfortunate initiative of the Executive Branch
that in the end may prove to be innocuous. In this sense, authorized
opinions believe that there may be another improvement in the exchange
offer because even with 60/70% acceptance rates on an international
level, it can not be said that the default is something from the past,
as there could perfectly well be a second round with funds and other
major creditors who are pressing and will continue to do so after the 25th
of February. We disagree with said opinion and expect that creditors
opting out will only be those ready to seek court pronouncements and,
with an ability or capability to be patient, so that they can wait until
the government decides to come to the table and negotiate. Of course,
this could never imply the reopening of the exchange offer since it
would immediately trigger the most favored creditor clause
inserted within the Argentine exchange offer, allowing all creditors to
enjoy the better conditions, forced by the courts at any particular
case.
From
a financial point of view, it is very difficult to justify this offer
and recommend it (the haircut at net present value is about 68%)
and it is common to find lots criticism to it because it is perceptible
that at the time many who were unfortunate enough to have bought
Argentine bonds were deceived with regards to the possibilities of
Argentina, whether we like it or not.
We
recommend to our clients and friends to read (in Spanish) an interesting
article in the newspaper La Nacion of Buenos Aires of this past 8th
of February regarding the general feeling in conection with the law passed by
Congress. Click here
to read the article. We are available to provide our clients and friends
with a free translation of the article.
There
are also other factors on which the success of our country depends.
Another important one is the final resolution of the always present
issue of the re-negotiation of the contracts with the public utility
companies, which, if not resolved, could generate a new default for the
country of approximately half of the defaulted debt, given the number of
the proceedings before the ICSID – among other arbitration tribunals
– initiated by investors in these companies. Most of the proceedings
are based on arguments of unfair expropriation by the government, the
pesification of the income of the companies, together with the
prohibition by the government to adjust their prices and rates in
accordance with the operating changes as a result of the devaluation in
the beginning of 2002.
In
this sense, the current president of the Spanish government in his
recent visit to Buenos Aires said– with regards to the Spanish public
utility companies privatized in the ’90’s – that, despite
supporting them insofar as a “logical and reasonable” adjustment of
the rates, he requested of them that “they do not put the government
between a rock and a hard place”. Without a doubt, an important
gesture of support of the government by a chief of government
representing a country that has invested in this sector almost as no
other has.
The
case of the company Aguas Argentinas (Suez Group – France,
owner of three water and sewage services companies) has recently become
an emblematic case, where the government has shown its firmness – that
in certain cases is seen as exaggerated- but also the possible
incomprehension of the public utility companies (and their investors)
concerning the situation of the consumers in this fatigued Argentina, as
a result of having to face increases in utility prices that do not
relate to the reality of an economy that has suffered the effects of
this unique economic, financial and institutional Tsunami in
2001/2002.
Despite
the meetings held in Paris days ago between Presidents Kirchner and
Chirac, the government has decided to terminate the contract with Aguas
Argentinas alleging the lack of investments by the company. The company
in turn has sued the government for the inability to increase its rates,
as permitted in such contract, a sort of chicken or egg dilemma.
The conservative Minister of Economy – a notable sector of the
government for its accomplishments in the last three years- recommended
to go on again with the dialogue and not to go ahead with threats,
which, as it now appears to be the custom, are nothing more than words.
We will keep you informed on this matter since it could be the beginning
of a new and negative process for the re-acquisition of companies by the
State, something that we do not like to happen again.
A
negative fact is that as a result of the arbitration proceedings before
the ICSID and the impact that this has on the crisis of the company Aguas
Argentinas, the government appears to be willing to object to any
arbitral award of this organization alleging the unconstitutionality and
violation of national public order, with the expectation that our
Supreme Court will back them up. Likewise, the government, through its
Attorney General, Mr. Horacio Rosatti, is seeking the creation of a new
Administrative Court with jurisdiction over the provision of public
services and in which companies and their shareholders (empowered today
by the Investment Protection Treaties of the 90´s to do so) should in
the future necessarily litigate before resorting to ICSID.
It
is expected that, notwithstanding the mentioned crisis, public utility
rates will be increased to reasonable levels that allow the carrying out
of necessary structural investments. In order to achieve this objective
in the upcoming days, a joint mission of the IMF and the World Bank will
be coming to Argentina.
Last
and finally, the success of the reinsertion of Argentina into the world
will depend also on whether or not the postponed structural reforms
–e.g. tax, labor and financial laws reforms- are conducted. All those
reforms have been requested by the IMF and the G7, in order to allow a
different perception of Argentina towards the future in terms of the
possibilities of once again becoming a serious recipient of foreign
direct investment, returning likewise to the capital markets which today
is not possible.
This
is without saying that the doubts as to the complete validity of the
rule of law and judicial independence which affect the entering into
contracts – in and with the country – generates logical worries
about the future and makes the spectrum of things still to be improved
very broad. The criticisms made of Argentina in the recent Davos meeting
– although they have actually been seen as very exaggerated by even
the US government- indicate that our country should permanently restate
its long-term objectives for the re-foundation of many of its
institutions.
As
far as the relationship with the IMF, despite the success of the debt
swap, a difficult year is expected, as much for the resumption of the
agreement suspended with the organism this past September (the reasons
for which were informed in prior newsletters), as for the higher degree
of autonomy that the government of President Kirchner would like with
respect to the multilateral organizations and their permanent
monitoring. In this sense, it is a fact that Argentina – in addition
to the important economic achievements and the facing of the resolution
of the default – has not yet been able to carry out the structural
reforms requested by the IMF and it cannot be ignored, as those reforms
are necessary for the future of the country. It is reasonable without a
doubt that due to what has happened in the past, those that try to
assist the country request changes that the political class itself has
not been able to carry out up to now.
The
underlying question is whether this government is capable of doing those
reforms so. There is no doubt that for President Kirchner it would be
possible for his part, given that since the beginning of the year his
team has already begun to take steps towards his reelection for 2007
under the concept that the work started in 2003 has to be finished and
four years is not enough time. There certainly exists a positive change
in his attitude - seen by many as hostile towards others outside the
country and the business world in general – having recently in a
public speech on the 26th of January condemned the default,
the debt and the corralito (the 2002 freeze of people funds) as
evils afflicted on Argentina and for which he wants to turn a new page.
At this point, there is no doubt that the President has it very clear
that the judicial security can not depend on the party in power in
Argentina and that steps must be taken soon in this respect.
We
are nevertheless quite optimistic about the future of our country; in
particular in the economic medium term. As a prestigious economist of
our country recently said, if the debt exchange does not work, the
economy will grow reasonably; if it is successful, it will grow in a
spectacular manner in 2005. To cite another view, a positive sign is the
recent public statement of the oil company Shell who said it will not
leave the country despite rumors to the contrary and despite speculation
that the Venezuelan oil company PDVSA would acquire its business in
Argentina. These are reaffirmations that the leading companies in the
world believe in the future of Argentina. But we cannot fail to mention
that the importance of the debt swap is minor compared to the necessary
investments in productive sectors of the economy that sustained the
major growth seen in the last two years, accompanied by structural
improvements, mainly tied to tax and labor reforms, as well as the
return of business and consumer credit at levels that nowadays are still
seen as low and below capital replacement level.
We invite you to discuss with us any specific issue that arises as a result of reading this newsletter. In this regard, please do not hesitate to contact partners Jorge Otamendi joo@gbreuer.com.ar or Alberto Navarro anavarro@gbreuer.com.ar
Sincerely,
G.BREUER
Tel:
+54 11 4313-8100
Fax:
+54 11 4313-8180
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Our law firm, through our partner Jorge Otamendi, has successfully represented Movicom / BellSouth in the merger process with Telefónica before the Comisión Nacional de Defensa de la Competencia. For further information, please click here.
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You will also find attached to this edition the February edition of our Boletín Informativo (BI) and of our Boletín Informativo Tributario (BIT), both of them publications we prepare with the latest legal and tax news for our Clients & Friends in Argentina and would also like to share with you.
Please note that the information given in this bulletin is for general purposes only. It does not aim to provide comprehensive legal advice on any issue.
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Tel:
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Fax:
+54 11 4313-8180