European Mkts Unfazed By Argentine Default, See Deal Soon

By Robert S Duncan

10 September 2003

Dow Jones International News

News that Argentina defaulted on a $2.9 billion payment to the International Monetary Fund isn't swaying European convictions that better days are ahead for the Latin American country.

Argentine President Nestor Kirchner refused to accept the IMF's conditions for a new three-year aid program Tuesday. Instead, he opted to default on the country's $2.9 billion payment, the largest default in that organization's history.

In general, the reaction to the news in European markets Wednesday was muted. That's mostly because of the perception that, despite the default, an agreement will be reached between Argentina and the IMF.

Argentina is expected to negotiate an agreement at the IMF meeting in Dubai later this month, but later Wednesday Kirchner indicated a deal could come even sooner.

The president said the government is "very close" to "resolving its international obligations." He said this is "very important" because "this will create a framework for the possibilities and projections of Argentina in the future."

Cabinet Chief Alberto Fernandez added that there are few major differences between the two sides. "All that is left to resolve is in the area of how the (fund) disbursements (from the IMF) will be done," he said.

That's good news for Spanish, Italian and German investors who hold Argentine bonds. Italian investors have the most exposure, holding EUR13 billion in bonds.

"All bond holders have been affected by the news in general, but at the end of the day we'll get it fixed," said Finbar Murray, the head of fixed-income and emerging markets at EBN Bank in Madrid. "We've been in worse situations with Argentina."

Argentina's external debt was unchanged in early, illiquid trading Wednesday, with all maturities quoted at 25%-35% of face value. Argentina's default also had a limited impact on euro swap spreads, which widened 0.5 basis points to 8.5 basis points.

But don't look for wide fluctuations on the Argentine peso, said Adam Slater, emerging markets strategist at Credit Agricole Indosuez.

Still, a forthcoming agreement should raise hopes among Spanish company executives who have been pleading for the Argentine government to raise tariffs for public services.

"I don't think of this as a default, but more of a delay in making the payment," an economist at Caja Madrid said. "There is going to be an agreement, and it will include an agreement to increase tariffs.

"This (the default) is a negotiation tactic," the economist added.

While Nicolas Kamp, an economist with Latin Focus in Barcelona, sees an agreement being reached soon, he's less confident it will include any tariff increases. Kamp notes the Argentine congress has already "technically approved" delaying those tariff increases until 2004. In other words, there will be increases, but not right away.

Spanish companies that are most affected by a delay in any tariff increase will be those that operate in the public sector, such as Telefonica SA (TEF), Aguas de Barcelona SA (E.AGB), Abertis SA (E.ABZ), Endesa SA (ELE) and Repsol YPF SA (REP), said Spanish brokerage Ibersecurities. All those stocks were lower midday Wednesday, but more from Europe-wide selling than from fallout over the Argentine default, traders said.

"The Argentine story so far this year has been an improving one," said John Davitte, an analyst with Ideaglobal in London. "People in general have thought that the worst is over," with most investors having written off their Argentine assets over the last two years, he said.

Davitte's comments are mirrored by those of an official at Santander Central Hispano SA (STD) who said: "Argentina is completely ring-fenced on our books. We remain more optimistic than we were a few months ago on Argentina's prospect."

SCH's rival, Banco Bilbao Vizcaya Argentaria SA (BBV), declined to comment.

At Italy's Banca Nazionale del Lavoro SPA (I.BNL), a spokesman said the bank had already written off the value of all its assets, loans and credit lines in the Latin American country.

Spanish-Argentine oil company Repsol also declined to comment on the default news, but a spokeswoman said the company is still planning on investing around EUR700 million in Argentina this year - the same as it did in 2002.

"That's the type of investment that a company makes in countries where it wants to stay," the spokeswoman said.

Corporate bond traders said bonds issued by Repsol and Spanish telecommunications firm Telefonica were unchanged to slightly softer, but in line with the market. Telefonica's euro-denominated bonds due 2013 traded at 54/51 basis points over swaps, while Repsol's 2013 bonds were quoted at 74/70 basis points over swaps.

Telefonica just last week reiterated it is committed to Argentina and doesn't believe it will be necessary to inject more capital in its Argentine subsidiary, Telefonica de Argentina SA (E.TAS). The telecom giant declined to comment for this article.

In France, the reaction was also muted, mostly since companies such as Total SA (TOT), Electricite de France (F.EDF), Suez (F.SZE), Carrefour SA (F.CAR) and Casino Guichard-Perrachon Et Cie SA (F.CDG) all wrote down the value of their assets in Argentina last year.