Nation Effectively in Default, Two Wall St. Rating Firms Say

By Anthony Faiola
Washington Post Foreign Service

BUENOS AIRES, Nov. 6 -- The "voluntary" debt restructuring offered by Argentina, Latin America's third-largest economy and one of the world's biggest debtor
nations, is effectively a default on a chunk of its $132 billion debt, two bond-rating agencies on Wall Street determined today.

As the embattled administration of President Fernando de la Rua pushed ahead today with the first phase of the deal, launching negotiations to swap $60 billion
worth of debt with domestic bondholders, Standard & Poor's Corp. declared Argentina in "selective default" -- the same designation it gave Russia in 1998 after
Moscow reneged on payments to investors. Another leading agency, Fitch Inc., dropped its ratings on most of Argentina's bonds deep into junk status, saying the
government's plan constitutes "a default event." Moody's Investors Service followed with a warning that the deal had the "characteristics" of default but said it was
further studying the plan.

The declarations heralded what in monetary terms would be the largest default ever by any single country and a major setback for de la Rua, who is desperately
trying to fend off financial collapse amid domestic political disarray.

Foreign investors are likely to shun Argentina for months or years as the taint of default deepens a 41-month spiraling recession. It is also expected to worsen a social
crisis that has brought soaring poverty and unemployment to the nation that was long considered the wealthiest in Latin America, and potentially accelerate a run on
Argentine banks that could force a devaluation of the peso, which in turn could lead to a string of personal and corporate bankruptcies.

"It might not sound like a classic default -- or a country simply saying we're stopping payments," said Marie Cavanaugh, director of sovereign ratings for Standard &
Poor's. "But in our judgment, any loss of promised investor value constitutes a default. And there is no question that this is what we're seeing now in Argentina."

De la Rua announced last Thursday that Argentina would "voluntarily restructure" most of its $132 billion debt by swapping billions of dollars worth of existing bonds
with high interest rates for new ones yielding less.

Though the Argentine debt crisis comes at a troubled time for the slowing world economy, political bedlam and a failure of a series of attempts to jump-start the
moribund economy here have led economists to predict a default for months. That, and the fact that investors appear to be increasingly savvy about drawing
distinctions among developing nations, may limit the blow of an Argentine collapse on other emerging markets, analysts say.

With the International Monetary Fund and other lenders distancing themselves from any new bailout for Argentina -- which received an additional $8 billion from the
IMF in August -- investors are likely to feel the pinch. Argentine debt accounts for a quarter of all publicly traded emerging-market debt and is widely held by
investors both small and large in the United States.

The Argentine debt crisis, however, is unusual in that it raises the question of how one defines a default.

Argentina insists that the swap is voluntary and does not constitute a default. It has promised to back up the bonds with dedicated tax revenue as an "added value"
guarantee, which it insists will make up for lost interest. Though some investors here said they will only accept the deal grudgingly, a group of Argentine bankers, who
along with pension funds and insurers hold about 40 percent of the country's debt, met with de la Rua today and voiced initial support.

"We see it as positive," said Manuel Sacerdote, vice president of the Argentine Bank Association. "It's a coherent plan, and we hope it is successful."

But in a country with diving tax revenue, debt-rating analysts have largely dismissed the Argentine "value added" guarantees. The analysts say the deal implies that
those who swap their debt will see a significant loss, while those who don't face an even greater risk of losing even more. There is also little sign that Argentina can
win added guarantees from the IMF, the World Bank and other multilateral lenders for a pool of funds needed to back up the second phase of its plan -- a swap
with foreign creditors set for later this year.

Argentina is trying to save $4 billion to $5 billion a year in interest payments by reducing the rates on its debt -- now ranging from 11 percent to 24 percent -- to 7
percent. In addition, the government wants to extend maturity rates, or the dates in which Argentina must pay back the bonds, by three years.

Though the default designation was widely expected, the key now will be how Argentines themselves react to it. In the 24 hours after Argentina's announcement of
the debt swap, reserves at its central bank fell 1.5 percent, to $20.9 billion, as locals feared a default or devaluation.

If Argentines stage a massive run on the banks, the government many be forced to abandon its policy of fixing the U.S. dollar to the peso at a one-to-one rate, to
control hyperinflation. That could prove devastating. Though Argentines earn in pesos, roughly 90 percent of public and private debt -- from home mortgages to
corporate loans -- are denominated in dollars. Although the government has said it would adopt the dollar as the local currency, a devaluation could further depress
the economy.

"We have to wait and see how Argentines react," said Martin Redrado, chief economist for Buenos Aires-based Fundacion Capital. "That is the key now."

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