Selling the sizzle: Buenos Aires province tries to clean up, upstaging the government in the process.

Argentina's US$141 billion default at the end of 200]--the biggest the world had ever seen--triggered mass panic on trading desks across the world. It. also immediately set off a chain reaction in the Argentine hinterland. From Patagonia "all the way north to the border with Bolivia, cash-strapped provinces were obliged to stop payment on their debt, some $6 billion in the form of internationally issued bonds.

Leading the way was Buenos Aires province, Argentina's largest district and home to the majority of the country's industry and population. But therein the similarities with the federal government end.

Unlike Argentina's central government, Buenos Aires province went out of its way to avoid an acrimonious confrontation with creditors. First it retained the services of consultant Citigroup, the same seasoned team that won market praise for efficiently restructuring Uruguay's $5.4 billion debt a year earlier. Then, in November 2003, the province's economy minister, Gerardo Otero, accompanied by Buenos Aires legislators, went on a six-city road show to visit creditors in the United States and Europe. What the province wanted was an eventual deal to restructure some $2.7 billion in 17 different defaulted bonds.

"We tried to be as humble as possible," Otero said in an interview just before the start of 2004. "We laid our dirty laundry on the table so everyone could see and then waited for reactions."

It couldn't have been an easy task. Argentine Economy Minister Roberto Lavagna had, just two months earlier, made a take-it-or-leave-it offer of a 75% haircut to holders of $87.5 billion in bonds. The federal government's tough stance infuriated investors, many of whom are also creditors to the province, and increased the prospect of drawn-out negotiations and legal action against the country. The stalemate also persuaded Citigroup, along with 11 other major investment banks, to reject Lavagna's invitation to partake in the bidding to become a syndicate bank liar an eventual deal.

By all accounts, though, the province's proactive posture--especially in contrast to Lavagna's--was a huge success. "They showed a real willingness to get a deal done quickly," says Roberto Krutiansky, director of Greylock Capital Management in New York, which holds $50 million in Buenos Aires province debt and a couple hundred million more in Argentine bonds. "Dancing around the sovereign's antagonistic stance required a lot of tact."

At press time, Otero and his advisors were preparing a proposal. If accepted by investors, a final deal could be completed quickly, Otero says.

Deal done, time to move on, right? Not exactly.

Fearing that the legitimacy of his own hard-line stance was being undercut, Lavagna has emerged as a potential spoiler, analysts say. When the Buenos Aires province legislature, in a rare display of eagerness, voted to authorize the restructuring in January it included an option permitting, but not obliging, the province to entrust the process to the federal government.

Otero says it's pure protocol, since the federal government, through a tax revenue-sharing agreement, is the provinces only current source of financing. "We have to be the principal protagonist in resolving our debt problems, but the federal government as our biggest creditor has the final word," he says. "So far, they've expressed no major disagreement with our approach."

Doubts. Not everyone is sure that things will go so smoothly. The province's Peronist governor, Felip Sold, has increasingly tied his political fate to Argentina's popular president, Nestor Kirchner. The political pressure to follow the president's lead and do its part to help in the sovereign's protracted negotiations may be too difficult to resist. "There's definitely an element of doubt about whether the province will be left to its own devices to pursue an independent restructuring," says Siobhan Manning Morden, emerging market strategist for Caboto USA.

The litmus test is whether the province follows its own timeline and presents a less harsh proposal than Lavagna. Otherwise, all the valuable time spent on clever marketing will have amounted to little more than a lengthy exercise in face saving. "Our means aren't limitless," Otero says. 'At the end of day we face the same challenge [as the federal government] of reducing our debt levels to sustainable levels over the medium term".

JOSHUA GOODMAN * BUENOS AIRES