2003 Annual Meeting
An overflow crowd of 350 market participants attended EMTA’s 2003 Annual Meeting on December 4, 2003. Argentina’s Secretary of Finance Guillermo Nielsen delivered the keynote address, becoming the fourth Argentine official to deliver a keynote address at an EMTA meeting (following Annual Meeting keynote speakers Economy Minister Domingo Cavallo in 1992, Secretary of Finance Daniel Marx in 2000, and former Secretary of Finance Guillermo Mondino, who addressed EMTA’s Spring Forum in May 2003). The event was again hosted by Citigroup at its headquarters in the Tribeca area of Manhattan.
Nielsen: Unprecedented Debt Restructuring Will Require A Deep Write-off 
Secretary Nielsen recalled that he had attended EMTA’s 2002 Annual Meeting as the guest of keynote speaker John Taylor of the US Treasury, having trudged through last year’s blizzard. Nielsen reminded the audience that the topic of last year’s speech by Taylor, the IMF’s proposed Sovereign Debt Restructuring Mechanism (SDRM), now seemed a “very out of date discussion.” Next year, Nielsen declared, “When you resume your Annual Meeting here at EMTA, I hope my topic – the restructuring of Argentina – is as distant from today as SDRM is now.”
Nielsen admitted that he rarely accepted speaking engagements, and tried to limit his public speeches to once or twice per year. “But I felt I had to be here,” he commented, adding that he hoped his appearance would advance efforts to normalize relations with creditors, while also allowing for the government to respond to its own citizens.
Nielsen Recounts Failure of Previous Governments to Address Solvency Issue
In prepared remarks, Secretary Nielsen attributed Argentina’s past inability to promote robust and stable growth to the Convertibility regime, which he termed “the problem” rather than the solution. As a result of the lack of structural reforms and a sound fiscal stance during the 1990s, he continued, Argentina borrowed heavily from the international capital markets, which were “remarkably not impaired by its large fiscal imbalances, thriving in fact on global growth and financial market exuberance.” When external borrowing dried up, the country tapped domestic savings and multilateral financing in order to avoid default, he recounted.
Nielsen blamed the 2001 mega debt swap for then exacerbating Argentina’s problems, asserting that the exchange allowed the government to avoid the necessary corrections and postpone the debt restructuring reality. By 2001, Nielsen stated, “any sharp observer” of the debt problem should have realized that Argentina was not facing a mere liquidity crisis, but “a fairly evident solvency crisis.” An IMF rescue package served only to finance capital flight, while domestic pension funds were “irresponsibly used to sustain an economic model, even as it fell apart,” he remarked, with such funds having an average 70% holding of sovereign bonds in their portfolios.
Post-War Germany, not Ecuador or Russia, More Accurate Comparison
Turning to the “guidelines” for restructuring unveiled at the Dubai IMF meeting, Nielsen acknowledged that the implicit write-off which had been presented surpassed those of recent restructurings, such as those in Russia and Ecuador. “Unfortunately, these are not useful comparisons,” he asserted, observing that the sustainability of Ecuadorian debt remains far from certain, and highlighting the more limited scope of the Russian debt default. Nielsen argued that a more accurate comparison of the Argentine case was to post-war Germany, which included a write-off of 77% of debt.
Recently, Nielsen pointed out, the government had succeeded in stabilizing the economy and restarting growth, and its 3% primary fiscal surplus was at the highest level in over a decade. “We will face up to our duty, but not at the expense of the further suffering of the Argentine people,” Nielsen affirmed, noting that half of Argentines today live at or below the poverty line.
“Unfortunately, some market participants are not interested in either debt sustainability or the coherence of the [restructuring] proposal, but only on maximizing short-term market value,” he cautioned. Nielsen warned that this would lead only to market debate about whether a further write-off would eventually be needed.
Declaring that a debt write-off must be combined with “decades of sound, responsible economic policy” in order for the country to attract private investment from abroad, Nielsen forecast that Argentina would achieve 7% growth in 2003, and that 2004 “also looks promising.” He highlighted technological changes in the agricultural sector and import substitution industries as being encouraging. Unfortunately, debt incurred in past administrations failed to translate into improving infrastructure and was “evidently misused on an unprecedented scale,” according to the Finance Secretary.
Turning to the Dubai guidelines, Nielsen urged the audience to understand that Argentina’s capacity to pay should be based on “realistic assumptions” and not be reduced to thinking of the country as “a mere Excel spreadsheet.” He underscored Argentina’s desire to share the potential upside with investors, and that it is analyzing the possibility of GDP-indexed bonds as one of the restructuring options.
Nielsen Affirms Argentina Will Not Impose Unilateral Offer, Pledges Equal Treatment of Creditors
The market structure is vastly different from the 1980s and even from the past decade, Nielsen remarked. As an attempt to address this new environment, Argentina established Consultative Working Groups in Frankfurt, Rome, Zurich, Tokyo and New York; however, issues of representation remain not only among retail investors, but also among institutional investors. 
Nielsen reiterated that Buenos Aires did not intend to “impose a unilateral offer,” and that “equitable treatment is key.” He specified that retail creditors would be treated equally with institutional creditors, and that the former need not “pay fees to advisors to ensure fair and equal treatment.” The aim for the economic team was “progress through dialogue” and Nielsen pledged to give consideration to “any serious and feasible suggestions.”
A final solution to the Argentine crisis must be one of “trust and partnership,” he argued. Nielsen reaffirmed that the government is committed to transparency, and remains willing to discuss the assumptions behind the Dubai guidelines. International banks had been invited to become Regional Managing Banks for the debt restructuring, he informed the audience, and details of the Argentine proposal should be ready “by the end of January, or early February.”
Nielsen concluded his speech by stressing that the Argentine restructuring has no precedent because of the amount of the write-off, the magnitude of the debt involved, the diversity of investor goals and the variety of applicable laws. He promised that Argentina would do its “part of the job” to constructively solve the debt problem, and looked forward to “counting on [creditors].”
In response to questions from the audience, Nielsen declined to comment on the substance of a meeting held the previous day with members of the creditor community [see page 5 below], calling it more constructive to limit any discussions or comments to the group itself. However, he voiced optimism that the meeting was helpful in developing “a certain common ground, a certain degree of trust.”
When asked to address concerns of some creditors that Argentina had little incentive to conclude a prompt restructuring, Nielsen responded that the only thing Argentina could do was to remain consistent in its behavior vis-à-vis bondholders, and attempt thereby to develop trust. Nielsen refused to comment on the possibility that external Argentine assets could be attached to enforce New York court judgments, although he suggested that the government would prefer negotiation rather than litigation to address the debt issue.
Secretary Nielsen’s prepared remarks can be found on EMTA’s website. Click Here for the English version or Here for the Spanish version.
Investor Panel: Lower Risks Mean Lower Returns In EM Debt
Citigroup’s Tom Trebat steered the annual investor panel through a number of topics on the state of the Emerging Markets and forecasts for 2004. Trebat initiated the session with a question to panelists for their general thoughts on the direction of the global economy and EM debt.
Dave Rolley (Loomis Sayles) offered that his team is working with forecasts of Fed hikes of 75 to 100 bp in 2004, in line with market expectations. Rolley asserted that, people reduce their leverage only when the cost of funding increases, and noted that with recent statistics from EMTA showing trading volumes at 5-year highs, “it is very difficult to believe that there is not a lot of leverage left in the market which will have to be unwound” when rates rise. Rolley predicted that there would soon be an end, “to the asset class’ 13-year period of outperformance—not just of every other fixed income category but of most of the equity categories as well.” He concluded, “EM debt as the single best investment idea on the planet – that time may have passed and we may find our natural place as a fixed income performer— kind of low, single digit boring numbers and may give way to our equity colleagues.”
Mark Dow (MFS Investment Management) concurred that a paradigm shift may have occurred. From a fundamental perspective, emerging country leaders such as Brazilian President Lula have realized that, “if they don’t produce economic results, they are out, that’s the bottom line,” he declared. These leaders are progressively reducing their imbalances in order to remain in power. As a result, Dow surmised, risk is a lot lower, and returns are going to be “a lot less exciting.”
Alliance Capital Management’s Jim Barrineau argued that a shift to local currency is well underway as a result of modest expectations of US dollar-denominated asset returns. “I would hope that EM countries take advantage of this shift to open their capital accounts,” he stated. The extent of this shift will not be reined in by investor demand, according to Barrineau, but rather the means an investor has to do so, noting restrictions and taxation which discourage or prevent holding local currency-denominated debt.
Investors Warned to Watch for Shifts in Brazil, Additional Reforms Needed in Mexico
Responding to Trebat’s request to discuss individual country and instrument outlooks, Hari Hariharan (NWI Management) recommended that investors focus on corporates, encouraging attendees to look for issues which are from interesting industries, have good parentage and are high yielders. Hariharan declared that the most interesting EM trade currently is the Chinese yuan. The dollar is correcting against the euro but “very little is happening with the non-Japan Asia bloc, which is where the US has the bulk of its trade deficit,” he noted.
Barrineau stressed that as long as Brazil is buying back dollars, extinguishing dollar-linked debt and aggressively lowering interest rates, he would recommend an overweight in Brazil. “When these things change, we might dramatically change our view on Brazil but until that happens, pointless to focus on the exact amount of the overweight,” he reasoned. Dow concurred, “The wind is clearly at Brazil’s back, watch for signs of that wind shifting.”
Barrineau and Dow also agreed on Mexico. “While it’s hard to see spreads blowing out, the country is setting itself up for a crisis somewhere down the road if they don’t fix energy policy,” remarked Barrineau. Dow added, “Hopefully they will learn to deal with democracy, that’s really what is going on.” Dow expressed optimism that second and third generation reforms would eventually be carried out by the Fox government.
Turning to other countries, “Venezuela is an example of a country with lousy politics where you can make money,” Barrineau pointed out. The prospects for dollar investors are bright unless one believes that a “willingness to pay” issue might arise for political reasons.
As for Argentina, Dow questioned whether President Kirchner is “playing the populist game to consolidate his power base and then tackle economic reforms, or is he just someone lacking the ability to make diplomatic deals?” Dow conceded that he tended to be pessimistic.
Dow termed Turkey an “inertia story” and continued, “If they can keep the top spinning then they can make it, but their imbalances are even larger than Brazil’s; it ends up being such a psychological story which is hard to call.” Hariharan opined that Turkish equities were more interesting than Turkish debt.
Implications of Argentine Rescheduling Debated
Trebat solicited comments on the implications of the Argentine rescheduling. Barrineau replied that the current situation in Argentina matters less to the asset class than conventional wisdom dictates. “Their defaulted debt is a speed bump on the road that most of us have driven around,” he commented. Rolley countered that it might have market-negative ramifications, calling it a “non-trivial concern” that if Argentina is able to cut its debt stock dramatically yet regain market access shortly, other Latin leaders might be tempted to follow suit. Dow offered his assessment that despite Rolley’s concern, defaulting on debt is not a strategy ever voluntarily followed by governments because of a strong link between a government defaulting on debt and it falling from power.
Hariharan saw little incentive for Argentina to conclude a deal currently. No matter the outcome, Buenos Aires must address the “fundamental problem of the dichotomy between who owes the external debt and who accrues whatever dollar-generation exists in the economy,” he warned. Failure to solve this mismatch would make any deal a “farce,” he cautioned.
Following another excellent year of EM debt returns in 2003, panelists were conservative in their expectations of total returns in 2004. Hariharan forecast a 3.7% contraction, while other panelists predicted a 3% to 5% increase.
Argentina Bondholders Committee Briefs Audience On Talks With Secretary Nielsen
A short and impromptu briefing by members of the Argentina Bondholders Committee (ABC) followed the investor session. In introducing the Committee members, EMTA Executive Director Michael M. Chamberlin noted, that EMTA “offers a forum to the marketplace and does not normally take sides in deals or market disputes, and we have not done so in the Argentine crisis.” He added that it was EMTA’s intention in welcoming Finance Secretary Nielsen, as well as the ABC, to promote a better dialogue about how to restructure Argentina’s debt.
ABC Committee members declared that “any exchange that is based on Dubai terms will fail,” while being “quite encouraged” by comments from Secretary Nielsen in a meeting held in New York on December 3rd that appeared to show greater flexibility on the part of the Argentine government. They also voiced their preference for negotiation rather than litigation. Committee members outlined, and supported, their counter proposal for a 35% write-down on the face value of Argentine debt, with full recognition of past due interest.
As a new development, the ABC announced that agreement in principle had been reached to form a global steering committee with members of other creditor groups around the world representing both retail and institutional investors, as well as to the formation of technical and legal subcommittees. ABC representatives stated that they were looking forward to engaging in a dialogue with the Argentines, and concluded, “the first steps towards a comprehensive and sustainable solution are ahead of us.” Click Here for ABC’s restructuring counterproposal.
Sell-Side Analysts: Argentine Restructuring Seen As Protracted, Importance Of Mexican Reforms Debated
In introducing the Sell-Side panel, Joyce Chang (J.P. Morgan) pointed out the huge crowd at the EMTA meeting, commenting that it was not only due to the successful year but quite possibly a sign of “how stretched all of us are for finding value when spreads are at 6-year lows.” Chang prefaced the panel discussion with her observation that strong commodity prices, record inflows into the asset class from a diversified investor base, a revitalized Brazil, and an unexpected credit rating upgrade for Russia that boosts the asset class more into the spectrum of investment grade all boded well for the asset class in 2003.
Panelists were in agreement on their concern about the effects of eventual Fed interest rate hikes on Emerging Market debt. Tulio Vera (Merrill Lynch) forecast flat returns for the year, and reasoned that equities are probably now more attractive than debt. Goldman Sachs’ Paulo Leme expressed his concern with market volatility, with the bigger borrowers being the most vulnerable to the effects of US rate increases. David Sekiguchi (Deutsche Bank) admitted that a reversal of inflows into the asset class in the nearer term wouldn’t surprise him (although he expected that EM debt will eventually account for a greater share of global fixed income portfolios).
Arturo Porzecanski of ABN Amro opined that the asset class would be vulnerable in the 1st half of 2004 because sovereigns would offer a “deluge” of issues before the expected rate increases. However, Porzecanski was optimistic that once the supply pressure abated in the second half of the year, investors would “go out fishing again.” Chang offered her own opinion, agreeing with Porzecanski that there would be supply pressure, but expressing confidence that large strategic inflows would continue to come into the market.
As for political risk, Sell-Side speakers concurred that they could foresee no major problems that would have a systemic effect, although Colombia, Ecuador and Peru were highlighted as the most vulnerable countries politically. Opinion was also unanimous that the biggest EM election next year – that of Russia’s president – was likely to be a non-event.
Porzecanski described the lack of “nail biting” elections in any major EM country as a “very big plus” for the asset class in 2004. He conceded there may be some pre-election jitters in the Philippines but stated that these could not be equated with the level of concern during the Brazil presidential campaign in 2002.
Opinions varied to some degree on the likelihood that President Chavez would not remain in power in 2004 (with Vera the most outspoken about an early exit for the Venezuelan president). Porzecanski agreed that an ouster of Chavez would be “market positive” and cited the market reaction to the renewed attempts to the opposition to hold a recall referendum. Sekiguchi cautioned the audience not to forget that the aftermath of potential succession is “one with many risks.” Leme calculated that the downside risk to owning Venezuelan debt is greater than the upside, when one factors in the unknown direction of economic policy under an opposition government.
Relevance of Mexican Reforms Debated
Sell-Side analysts discussed the relevance of progress on Mexican reforms to its debt performance. Leme acknowledged his disappointment with the performance of the Mexican legislature, and stressed that even simple things that should be “sure things,” such as the confirmation of Central Bank Governor Ortiz, became a complicated political issue in the Senate.
Vera echoed Leme’s skepticism. “The bottom line is that we are going to get very minimal reform in Mexico this year and the foreseeable future,” he declared, adding that whatever legislation is passed is likely to be watered down and disappoint the market. However, Vera remarked, from the point of view of a sovereign balance sheet and a sovereign cash flow, Mexico remains impressive. Vera specifically praised Mexico’s performance on liability management, and argued that its financial health and growing integration with the US will result in credit upgrades despite stagnation on reforms.
Porzecanski defended his earlier labeling of Mexico as “boring,” noting that, because of the willingness of “credible, effective Mexican” officials to adjust spending to the level of revenues, the lack of structural reform would cause little damage.
Analysts Recommend Against Adding to Argentine Defaulted Debt Holdings
Chang also polled panelists on what recommendations they were making to Argentina’s bondholders. Sekiguchi offered his assessment that the uncertainty is so large that he is not expecting a restructuring proposal for awhile, and is advising clients to consider Argentina corporates and inflation-linked assets rather than defaulted debt. Porzecanski warned that signs of recent flexibility by Buenos Aires is not enough to finalize a deal, and voiced concern that legal remedies might be pursued by some more creditors.
Leme predicted that a restructuring would likely be protracted and would advise bondholders to sell. “The main issue is the underlying cash flow machine that could generate a nice income stream for bondholders after a restructuring is still not there,” he stated. Leme seconded comments by bondholders who had urged the Argentine government to take advantage of their window of opportunity to “get the fundamentals right.”
Vera suggested that owners hold, but not add to, their current holdings, a change from recent days in which he would have recommended selling such assets. He conceded that his relative optimism was likely his most “out of consensus” view.