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UPDATE 5-Argentine asset prices slide, country risk soars on debt 'reprofiling' plan

Hugh Bronstein and Walter Bianchi

'reprofiling' plan@ (Adds comment from political analyst, lawmaker, updates market levels)

BUENOS AIRES, Aug 29 (Reuters) - Argentine asset prices fell on Thursday and country risk soared to levels not seen since 2005 after the government announced plans to "reprofile" about $100 billion of its debt, leaving investors scrambling to assess what kind of hit they might take.

The latest round of volatility to buffet the recession- and inflation-racked country began when business-friendly President Mauricio Macri suffered an unexpectedly harsh defeat in an Aug. 11 primary election at the hands of populist-leaning Peronist Alberto Fernandez.

Investors fear that the return of the left to power in Argentina could herald another full-blown debt crisis in Latin America's third-largest economy.

By the time Treasury Minister Hernan Lacunza said on Wednesday the government wanted to extend the maturities u r i t i e s - o f - i n t e r n a t i o n a l - b o n d s - i m f - d e b t - i d U K K C N 1 V I 1 M W of short-term local debt instruments and would negotiate with holders of its sovereign bonds and with the International Monetary Fund, a debt revamp was already widely expected.

Argentine spreads over safe-haven U.S. Treasury bonds, a measure of the perceived risk of default, nonetheless shot 185 basis points higher to 2,257 on Thursday, according to JP Morgan's Emerging Markets Bond Index Plus.

Developing markets investment house Tellimer calculates that $7 billion of short-term debt, $50 billion long-term debt and $44 billion of IMF debt may be earmarked for an overhaul.

Lacunza labeled the debt-extension operation a "reprofiling" of obligations that will affect institutional rather than individual investors.

He said he would send a bill to Congress to approve changes to bonds governed by local law. Talks with holders were expected to start soon, but would likely be concluded by the government that wins the October general election and takes office in December.

Fernandez, whose running mate is former President Cristina Fernandez de Kirchner, is now the clear front-runner.

"We remain cautious," Citi said in a note. "While we think the short-term funding needs have been addressed, political uncertainty remains high: any proposal on global bonds could be unwound by the potential new administration."

The peso slipped 0.26% to 58.25 per U.S. dollar, having lost 22% of its value since Macri's primary vote debacle all but erased his chances of being re-elected in October.

Over the counter government bonds weakened 5% and the Merval stock index sank 4% at the open amid uncertainty over the government's ability to carry out the debt reprofiling so close to the presidential election in October.

The Merval has plunged more than 45% since the primary vote.


The central bank spent $367 million of its reserves in foreign exchange market interventions on Wednesday alone, part of its effort to defend the beleaguered local peso.

"The pre-emptive announcement from the Macri administration to voluntarily re-profile debt shows cash flow desperation after consistent foreign exchange reserve loss," said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities in New York.

"It now looks like a disorderly phase of a debt restructuring with a piecemeal strategy of seeking debt relief without a comprehensive debt repayment plan," Morden said in a note, adding, "capital controls could quickly follow as this official recognition of cash flow stress will only trigger further dollar demand and capital flight."

Key players going forward will be the IMF, which has a $57 billion standby loan deal with Argentina and Fernandez, who is now the front-runner to become president at the end of the year.

Fernandez had said earlier that he wants to renegotiate the IMF pact, which calls for unpopular austerity measures that had damaged Macri's popularity and set him up for the drubbing he took in the primary vote.

A crunch point could be Sept. 15, when the next IMF loan tranche - about $5.4 billion - is due to be disbursed.

The reprofiling will first apply to short-dated debt denominated in pesos as well as dollars but issued under local law, Lacunza said. That would require approval from Congress.

Macri-allied lawmaker Eduardo Amadeo told Reuters that Congress will decide by how long the government will seek to extend maturities. "It's something that has not been decided yet," he said.

The Macri administration would need support from Fernandez and Peronist opposition lawmakers to get the reprofiling through the legislature.

"The opposition can make the debate in Congress quite painful for them and highlight that even the need to be debating this measure is a failure of the government's policies," said Buenos Aires-based Megan Cook, lead specialist for political and regulatory risk at the Cefeidas Group.


So a major question is how Fernandez will react to the reprofiling plan, considering he may become president in December. He had not made any public comments about the plan as of Thursday.

"In our view, risk/reward remains skewed to the downside, considering the confusions and uncertainties surrounding these announcements, including (but not limited to) how Fernandez will react," Deutsche Bank said in a note.

Restructurings are a traumatic subject for voters who remember the country's 2001-2002 default, which punctuated an economic meltdown that tossed millions of middle-class Argentines into poverty. Subsequent mini-defaults kept the country locked out of global capital markets for years.

Macri prided himself on getting the country out of default early in his administration and promised to reintegrate Argentina with the global markets. But Macri overestimated his ability to attract the foreign direct investment needed to provide Argentina with sustained economic growth. (Reporting by Karin Strohecker, Marc Jones and Tom Arnold in London; Hugh Bronstein, Gabriel Burin, Walter Bianchi, Eliana Raszewski and Cassandra Garrison in Buenos Aires and Rodrigo Campos in New York; Editing by Hugh Lawson, Bernadette Baum and Tom Brown)