Willing suspension

IT IS entirely voluntary, you understand. The holders of Argentina’s $95 billion of government bonds are being asked to swap paper paying 11-12% (and well over 25% on the secondary market) for stuff yielding just 7%. The sweetener: you might actually be paid the interest. Because a gun has, in effect, been put to investors’ heads, two credit-rating agencies, Fitch and Standard & Poor’s, say that if the debt swap proposed by President Fernando de la Rua and his economy minister, Domingo Cavallo, goes ahead, it would constitute a "distressed exchange" and, in consequence, a default. That may have grim
consequences for Argentina.

Many overseas investment institutions are bound by their rules to dump assets deemed to be in default. Support from the G7 countries is jeopardised.
Argentina’s programme with the International Monetary Fund (which arranged $40 billion last December and another $8 billion this summer) would be torn up. In sum, says Jose Luis Espert, a Buenos Aires economist, Argentina "ends up as a financial leper".
The government’s position is desperate. In the country’s fourth successive year of recession, the economy is now shrinking fast, thanks not least to the peso’s iron tie, at parity, to the dollar.

The government, whose supporters suffered a heavy defeat in mid-term elections last month, badly wants to stimulate the economy by providing breaks and handouts-all, it claims, without widening the budget deficit by much. Previous measures have not worked, but then, the government reasons, it has not before
asked foreign creditors to pay for them. It aims to cut its interest bill by two-fifths, or at least $4 billion a year. This month alone it has to find $2 billion for interest payments-the immediate cause of its distress.

On November 6th, the government took its case to those local institutions-domestic pension funds and the like-that own something under half of the total debt. They have little choice. The government has strong-armed them in the past to buy Argentina’s bonds; an outright default would now bankrupt many.
The latest measures include a change to local accounting rules so that bonds have to be booked at (depressed) market prices.

At the same time, the government is giving local investors the chance to swap bonds for loans, which carry lower interest rates but can be booked at full value. Maturities are to be lengthened too.

Foreign investors will be much harder to deal with. If the offer really is voluntary, why the "guaranteed" interest payments, to be secured (how, exactly?) against future tax revenues? Wasn’t that where payments were supposed to come from anyway? The plain meaning is: take our new paper or face default on the old. Some sort of IMF guarantee might help to win foreigners’ agreement. But that idea is deeply unpopular in most quarters of the Fund.

For a start, trust in Mr Cavallo is at a new low. And, after putting together $48 billion for Argentina in the past year, to no avail, the Fund has egg on its face. It does not, for now, intend to accelerate the December disbursement of $1.2 billion due under the current programme.

It will want to lie low, at least until the G7, and America in particular, provide guidance.

George Bush’s administration is said to have decided privately to send no more money. Still, Mr de la Rua is due in Washington this weekend to plead with President Bush. He hopes to take with him a much-needed fiscal pact with provincial governors.
If Mr Bush is persuaded that Argentina must be bailed out, some kind of backing (or "enhancements") might be found for a debt deal. There is, for instance, the $3 billion the IMF pledged, vaguely, this summer towards a debt swap. If this is indeed a default, it will be a long and messy one. Will debt write-downs, if Argentina agrees them with creditors, be big enough to banish concerns about the durability of the currency peg? Or will they merely postpone a devaluation? And what will it take to get the G7 back on board?

What is plain is that long before this phase of Argentina’s saga is over, hard questions need to be asked about countries in trouble, and how to deal with them. Clearer rules are needed for how sovereign borrowers negotiate with creditors over debt rescheduling. At present, there are no conventions.

Clearer ideas are also needed about how to stop countries getting into trouble in the first place. Argentina certainly borrowed too much. Against that background, the IMF’s difficulty was, it seems, not being able to call an end to an unsustainable programme.

Even if Argentina’s impending default does not prove contagious to other emerging markets, as was Russia’s in August 1998, a global slowdown means there is no room for complacency now

Picture of José Luis Espert

José Luis Espert

Doctor en Economía

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