Betting he'll not cry over Argentina

April 18, 2004|By JAY HANCOCK

FEW INVESTORS try to make a killing buying bonds these days. Bonds have gone about as long and high as they can. Bond owners clip puny interest coupons, weep over reports of higher inflation and economize with Alpo-sandwich lunches, knowing the day of reckoning is nigh.

Not Mike Conelius. The skipper of T. Rowe Price's Emerging Markets Bond Fund is looking to perhaps double his money in a big bet on defaulted Argentine government debt. The deal reveals an interesting, untamed arena of the capital markets and a high-stakes game of chicken partly involving your tax dollars.

One recent move: At the request of one holder of Argentine bonds, a Maryland judge slapped an asset-freeze order a few weeks ago on a couple of Upper Marlboro warehouses owned by the Argentine navy and air force. The order later was lifted. The warehouses and contents are worth a pittance compared with what Argentina owes. And creditors always have a hard time seizing assets owned by other countries anyway.

But the case underscores an increasingly rancorous relationship between Argentina and its bondholders, and the large risk and promise of Argentine debt bets.

It is time "for Argentina to begin to negotiate with its creditors," says Conelius, who owns defaulted Argentine bonds with a face value of about $40 million. "Their economy has been growing gangbusters. It clearly shows they are doing better. They can afford to pay, in some way, their creditors."

Some background: Argentina devalued its currency two years ago and stopped payment on its bonds about the same time.

It devalued the currency because politicians thought that would boost exports. It defaulted on the bonds because it devalued the currency; it's hard to repay billions in dollar-denominated debt when a peso that was worth $1 when the money was borrowed is worth 30 cents when it has to be paid back.

After the default, the bonds plunged in price. Maybe they plunged too far. People such as Conelius spent much of 2002 snapping them up at 20 or 25 cents on the dollar, assuming Argentina would settle with lenders for much more than that.

So far it hasn't. Argentina has talked about what creditors say amounts to 8 or 10 cents on the dollar. That's far less than the 35-cent recovery that has been typical in recent years on defaulted sovereign debt, says Steve H. Hanke, a foreign currency specialist and professor of applied economics at Johns Hopkins.

Conelius, who scours the globe looking for bonds in less-developed countries and whose colleagues like to say has hotel phone bills higher than his room charges, bought perhaps his biggest chunk of defaulted Argentine bonds in July 2002 for 19 cents on the dollar. The bonds go for about 32 cents now.

He hopes to recover 40 or 50 cents on the dollar when all is said and done. To that end, he is active on U.S. and global creditors committees trying to reach a negotiated deal.

"We want a fair, equitable solution," Conelius says. "We know Argentina can't afford par. We know they can't afford 100 cents on the dollar. We know Argentina can afford a lot more than 10 cents. That's all we want."

Some creditors do want 100 cents on the dollar - or at least say they do in court.

Billionaire investor Kenneth Dart seeks $724 million in Argentine bond repayments in a lawsuit filed in New York. Another bondholder, Cayman Islands-based NML Capital, wants $172 million and temporarily got Argentina's Upper Marlboro military warehouses legally sequestered before the case was moved to Washington last month.

NML attorney Steven K. White declined to identify his client or comment on the case.

U.S.-based Argentine officials were unavailable for comment, but officials have previously said the country is still recovering from a brutal, post-devaluation recession, can't afford to pay what creditors want and would hurt the poor if it did. The standoff, meanwhile, helps repel badly needed global investment from Argentina and leaves bondholders with dubious paper that pays no interest.

As always with sovereign finance, diplomats are as important as lawyers and brokers. Treasury Undersecretary John B. Taylor is scheduled to visit Argentina this week. The International Monetary Fund, generously supported by American taxpayers and also owed billions by Argentina, is pushing for a settlement, too.

Hopkins' Hanke, who favored Argentine bonds in the 1990s when the peso was linked to the dollar, believes Argentina and its populist president, Nestor Kirchner, could set a new low for investor recovery on defaulted sovereign debt.

"I think Argentina is basically going to get by with paying less," he said. "I wouldn't touch the thing with a barge pole."

T. Rowe Price's Conelius is betting otherwise.

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