Argentina nabs 76% participation rate; emerging market debt holds gains; $176 million inflows

By Reshmi Basu and Paul A. Harris

New York, March 3 - Emerging market debt held onto gains ahead of the release of Friday's decisive job data in the United State, while Argentina announced the end results of its debt exchange.

Thursday marked the conclusion - barring any lawsuits - of a bitter chapter as the Argentine government announced the final results of its debt restructuring for $102.6 billion of defaulted debt.

"The default was the most important structural obstacle the country faced," president Nestor Kirchner said at the late afternoon press conference.

Economy minister Roberto Lavagna said holders of $62.2 billion of debt out of the $81.1 billion in principal amount participated, leaving just under $20 billion of bonds that were not restructured. The remainder of the $102.6 billion owing was past-due interest.

Argentina will issue $35 billion of new bonds.

Market sources said the exchange was seen as a success with 76% of bondholders taking part. Estimates had ranged from a participation rate of 70% to 80%.

"It was precisely in line with the latest market expectations," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"The market had drawn a threshold at about 70%," he said.

Both the International Monetary Fund and the international community would interpret anything below 70% as a failure, noted Alvarez.

"We think it's a successful restructuring for them. It's something that they will be able to use to come in and negotiate with the IMF."

In August, Argentina stopped talks with the IMF on an extension to its loan agreement pending a restructuring of its debt. Argentina's current three-year $12.5 billion loan agreement ends in 2006.

The new bonds will be issued on April 1. A market source added that Argentina's weight in the JP Morgan EMBI index will likely increase, as the new bonds will find a home on the index. This may help Argentine bonds rally.

"In this environment of very tight spreads, yes, I do think Argentine bonds can move up in price," said an emerging market analyst.

"Right now Argentina's dollar discounts are trading around 50 bps wide to a theoretical Brazil bond of similar duration.

"Given Argentina's excellent debt service profile coming out of the restructuring, I think it could eventually trade flat to Brazil," he added.

However, the market source said that there were more roadblocks ahead for the country, but the hard-line government can claim a victory.

"The restructuring may be over. But the story is far from over. There will be many lawsuits that could tie up any progress," he said.

EM debt holding its own

Friday may be seen as judgment day for the emerging market universe as non-farm payroll numbers are released. Emerging market debt has been on hold in recent sessions as it awaits some sort of direction from Friday's numbers. The market is expecting the addition of 220,000 new jobs in February.

"The tone in our market is fairly decent today [Thursday], considering the fact that payroll tomorrow [Friday] could blow us all out of water," said a sellside source.

"Overall, the market has a decent tone. Brazil is a little up today."

The sellside source said there has been more noise in the local markets in recent sessions.

"The real contender in our market for attention versus the dollar bond is local market securities. A lot of people have been playing local markets generally because the yields are so much higher," said the source,

The Brazilian real, has been fairly weak in the last few sessions, surprisingly given the recent performance of the dollar, noted the source.

"You may have had some people selling in local markets in Brazil.

"It's the local government debt market and the offshore non-deliverable forward swap market."

During Thursday's session, the Brazil bond due 2040 gained 0.45 to 116.40 bid.

Meanwhile Brazil's Bovespa rose 16% last month, the biggest gain since October 2002. Brazil's stock exchange saw $1.4 billion of overseas inflows into the market. Some have raised the question of whether investors will re-shift their portfolios and take on more equities.

"In a rising interest rate environment, it's tough to tell," said the analyst.

"Emerging markets fixed income will get hit, but so will equities, and in theory equities should be even harder hit as risk premiums increase.

"But you can argue that there's so little value left in EM external debt that equities will have to outperform bonds one way or the other," he added.

Inflows at $176 million

The market saw another positive week for mutual fund flows. Emerging market bond funds had inflows of $176 million in the week ending March 2, according to EmergingPortfolio.com Fund Research.

This is the 18th straight week of inflows. In the nine weeks of inflows for 2005, a total of $2.13 billion has entered the market. The previous week had an inflow of $190 million.

Global bond funds had inflows of $411 million in the latest week. These funds have had $3.569 billion of inflows year-to-date.

Venezuela devalues currency

Elsewhere Venezuela devalued its currency by 10.7%. The central bank said it weakened the bolivar to 2,147.3 to the dollar.

"It was a given by the market that they were going to devalue," said IDEAglobal's Alvarez.

According to practices in the past years, Venezuela devalues the currency in February, he said. The rumor of the devaluation had been in the market for a few days.

"In general, it was discounted event. So it did not have any direct impact on debt prices," he added.

Instead, high oil prices helped Venezuela. The bond due 2027 was bid at 104.60 late in the day, up 0.60.

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