Argentina, IMF and debt restructuring

It may be recalled that at the end of 2001, Argentina abandoned the Currency Board arrangement that had been established a decade earlier, and defaulted on its external debt, registering the largest-ever debt default in the history of international finance.

The background was that under the fixed parity with the US dollar, the peso had become significantly overvalued and the domestic economy had been contracting for four years (World Money, January 21, 2002).

For much of 2002, the Argentine financial system faced a major crisis. Unemployment was increasing and social problems were escalating. Meanwhile, there was hardly any movement on the restructuring of the defaulted debt.

However, Argentina bounced back last year, registering a GDP increase estimated at 8 per cent. After the Currency Board arrangement was abandoned, the peso fell sharply and is currently down by about 40 per cent in real terms compared to the erstwhile parity.

Indeed, this fall more than compensates for the earlier rise of the peso in real terms that led to the crisis in the first place, and has helped Argentina register a trade surplus in 2003.

In fact, prospects look so promising that Argentina experienced a flood of capital inflow last year and imposed controls on short-term funds to avoid upward pressure on the currency!

The quick recovery is also attributed to the authorities' success in ensuring that the sharp fall of the peso did not result in hyper-inflation "" currently, inflation is just about 4 per cent.

For students of international finance and balance of payment crises, the current status of Argentina's negotiations with the IMF on the one hand, and commercial creditors on the other, is very interesting.

As for the first, the Argentinian authorities took a hard bargaining position on International Monetary Fund (IMF) conditions, and went to the extent of defaulting, in early September, on a $ 3 billion payment due to the IMF, despite having enough reserves.

The IMF blinked first, but reached an agreement with the Argentinian government for rescheduling the $ 16 billion loans, on terms that some thought were too lenient in comparison with IMF conditions for other governments.

Apparently, this "soft" stance was the result of pressure from the US administration. Many in the IMF executive board did not take kindly to the weak stand and, somewhat unusually for that consensus-driven organisation, about a fifth of the board did not support the Argentine deal.

More recently, three heavy-weights "" the UK, Italy and Japan "" have joined the dissenters, demanding a tougher stand. Not that this matters much "" generally, Washington gets what it wants from the IMF. (In retrospect, John Maynard Keynes displayed foresight during the Bretton Woods conference in lobbying for the IMF headquarters to be away from Washington! He did not succeed, of course.)

Critics allege that, apart from the US pressure, one reason for the soft IMF stand is that it does not want to jeopardise recovery of its own loan, even if this means commercial creditors take a big hit.

If the end-2001 default was a record, the debt-restructuring process also promises to be equally precedent-creating. There are almost half a million individual holders of Argentinian bonds spread over the US, Europe and Japan. The total number of bond issues in default is 100, totalling $ 80 billion and in eight different currencies!

The Argentinians have taken as tough a negotiating position with the commercial creditors as they have with the IMF. The "non-negotiable" offer made earlier this year is a "hair-cut" (that is, write-off) of 75 per cent of the principal amount and concessions on the interest rate.

Together, in present value terms, this represents that the bondholders would get just about 10 cents on the dollar, that too, over a period of years.

This is the largest ever write-off demanded by a debtor country in the history of international finance. On their part, the bondholders have offered a 35 per cent write-off besides concession on the interest rate, amounting to a present value of about 50 per cent.

The creditors' task has become difficult also because all of them are unable to agree on a single negotiating position. The institutional investor/ lenders are represented by the Argentina Bondholders Committee, while most retail investors belong to the Argentina Bond Restructuring Agency.

A global committee had scheduled a meeting with the Argentinians last week; the latter refused to negotiate, merely sending an observer. Should one shed too many tears over the plight of the creditors? Perhaps not.

For years before the default, they were enjoying yields which were 6 to 7 per cent above US treasuries. If you want those kind of rewards, they come only with high risks! The secondary market price of Argentinian bonds is currently about 30 cents on the dollar.

The American anxiety to support Argentina also stems from the increasing disenchantment of Latin America with the Washington Consensus and the emergence of relatively "left of centre" governments in Brazil, the largest economy, and Venezuela, a major oil producer.

Thus, Argentina is a key country if free trade in the Americas, which the US is supporting, is to get a boost.

But coming back to Argentina's tough stand, you can get away with a lot if you have Uncle Sam on your side!

Email: avrco@vsnl.com