Fall
Forum Speakers Discuss Global Economy,
Argentina Restructuring
A
capacity crowd of over 150 EMTA members attended the association’s Fall Forum,
hosted by UBS Investment Bank on Monday, October 14, 2004. Speakers representing
major investment banks, as well as leading investors, discussed a wide variety
of topics including the global economy, the upcoming Mexican presidential race
and the Argentine debt restructuring.
Michael Gavin (UBS) initiated the panel discussion by polling speakers whether they expected the global economic and financial picture to remain as supportive for the EM debt market in 2005 as it has proven thus far in 2004. Guillermo Mondino (Lehman Brothers) asserted that it was "much more likely that we will continue to have a rosy picture in the future than not," acknowledging his continued bullishness, "even though the market is closer to fair valuation." Mondino advised, however, that investors should continue to monitor a number of potential concerns, such as US foreign policy vis-à-vis Iran and perhaps North Korea, sustained high oil prices and the Fed’s reaction to any inflationary effects of sustained high oil prices.
Gavin followed up by querying if the recent Latin American recovery was sustainable. Mondino affirmed that, in general, Latin American macroeconomic policies were better than they had been in the past, citing healthier fiscal positions across the board, the move from fixed to floating exchange rate regimes, improved balance of payments, and better monetary policies. While microeconomic policies were better in the 1990s, "reform fatigue has worn out," and there are small movements to make improvements in microeconomic policies once again (he foresaw possible reform progress in Brazil, Turkey and Colombia).
Market
Concerns on Mexican Presidential Frontrunner Overdone?
Is market concern over the
popularity of Mexican presidential frontrunner Andrés Manuel Lopez Obredor
overdone? "Absolutely," replied Lacey Gallagher of CSFB, who predicted
that, "If he were elected, he would be a much more pragmatic and much more
reasonable president than people expect." Those most concerned with the
possibility that he will be elected have neither met him nor discussed policies
with him, according to Ms. Gallagher. She speculated that, while he is taking a
hard line now, it is very unlikely Lopez Obredor would deviate from the
macroeconomic policies of the current administration -- and he might actually
have a better chance of passing structural reforms than his more right-of-center
predecessors, as is the case in Brazil under President Lula.
Mondino placed himself between Gallagher’s optimism and the market’s pessimism. "Bottom line: Mexico is not going to go forward with the number of structural reforms they need to advance in order to transform Mexico into a vibrant convergence case," he summarized. Lopez Obredor is "not squeaky clean," is more likely to have problems with the US administration than the PRI did, and would create tensions with the Mexican establishment if elected. However, Mondino stressed that he was not worried that the situation had the potential to become as confrontational as recent tensions in Venezuela.
Gavin interjected that Lopez Obredor’s record as a politician was mixed. "On the one hand, you can’t say he has run Mexico City into the ground; on the other hand, you can’t say his past actions are reassuring when it comes to respect for the rule of law," he commented. Ms. Gallagher replied that, despite Lopez Obredor’s populist appeal, he also had attracted US$1.7 billion of private investment into Mexico City from investors such as Carlos Slim. Greylock Capital’s Hans Humes commented that Lopez Obredor’s mixed record was "not unique" for a Mexican politician, and investors were best advised to be cautious with debt instruments during a Mexican election cycle.
Official
and Private Sectors Not in Zero-Sum "Death Struggle"
George Estes (GMO) was asked by
moderator Gavin to summarize the differences between the Paris Club of official
creditors and private sector investors. Estes reminded the audience that bond
investors look for returns, are willing to take legal action as a remedy in case
of default, mark their books to market, use NPV analysis when offered bond
exchanges, and prefer bond documentation that makes restructurings difficult. In
contrast, the Paris Club makes loans for political reasons rather than economic
factors (thus not focusing on returns), responds to restructurings based on
geopolitics and not with any recourse to legal action, does not mark its books
to market, and is not adverse to annual restructurings (in fact, frequent
restructurings is the organization’s raison d’être, noted Estes).
However, while there are dramatic contrasts in missions, Estes pointed out that the interests of investors and the Paris Club are not always "zero-sum." In cases such as Argentina, there is little official sector debt; while in Indonesia and Nigeria, bond investors account for a small percentage of the total debt "so I don’t think we are always going to be in a death struggle with the Paris Club."
In the current case of the Dominican Republic, official and private sector interests could potentially conflict, but Estes wasn’t worried about a new precedent or set of rules being created from the restructuring exercise. Greylock’s Humes attributed the often lack of a lingua franca between the Paris and London Clubs to the academic, non-investor background of Paris Club officials.
More
"Aries" Deals in the Offing?
Fall Forum speakers also discussed
the recent Aries deals. Estes expects similar deals in the future and would
consider them to be "good news." Fears of oversupply are overblown,
according to Estes, who highlighted the fact that such deals do not increase a
country’s debt load, but are rather a repackaging. He suggested Algeria,
Indonesia, Egypt and Pakistan deals could be forthcoming, a well as an
additional deal from Poland.
Argentine
Debt Restructuring
Humes, who also leads the Argentine
bondholder organization GCAB, acknowledged that he would be repeating previously
made comments on the Argentine restructuring. In contrast to the government’s
upbeat assessments of retail participation in any such deal, Humes asserted that
retail investors had organized themselves in an "unprecedented
manner", and few institutions would tender their debt into a debt exchange
at terms that were currently expected. Humes expressed concern over a
"gradual reduction in creditor rights" dating back to the Ecuador and
Uruguay restructurings, in which creditors had accepted deals that reduced their
rights solely because the exchange offers had exceeded market expectations.
"In Argentina we are seeing a process by which a borrower is not really working with its creditors, but is imposing its view of a satisfactory conclusion, so participants in the market should be alerted to the fact there is a precedent being established," Hans warned. He opined that the official sector might even be more alarmed at the precedent than investors. "Quite honestly, I don’t know where this is headed," he stated, while offering his assessment that more legal actions might be filed in Europe, though not as many as in the US.
Mondino, a former Secretary of Finance of Argentina, argued "it’s not an issue of capacity to pay at this point; it’s an issue of willingness to pay." The negotiating strategy of showing very little willingness to pay had been successful in toning down investors’ expectations for a restructuring offer, according to Mondino.
"Argentina is the holdout issue on its head -- in the past you can settle with them out of court after a high participation deal, but you cannot compensate a holdout when a deal has 60% participation," he reasoned. Mondino concurred that prospects for participation in a deal at terms expected at the time of the Forum were not great. "Do they have real willingness to solve this problem," he asked rhetorically, "I just don’t know."
As the discussion drew to a close, Humes expressed bewilderment at the final stage Argentina game plan. The potential legal chaos resulting from a deal with less than 50% participation simply didn’t justify Argentina’s current position, he declared, while adding that the government had the capacity to add enough "bells and whistles" to its proposal to placate investors.
Following the Forum, meeting attendees were able to peruse UBS’ impressive modern art collection, including works by David Hockney, Lucien Freud and Francesco Clemente.