Creditors Blackball Argentine Debt Plan

Lord Keynes is alleged to have said, "If you owe the bank £100, you're in trouble. If you owe £100 million, the bank is in trouble." Argentina owes around $100 billion to bondholders worldwide, and the government is trying to convince them to accept a 75% write-off. Thus far, the creditors are against the plan, but they may change their tune. When the negotiating is done, the odds are it will be Argentina's offer or nothing.

Clearly, there must be some kind of restructuring of the debt. The country defaulted on $88 billion in debt in 2002. The World Bank says that Argentina's GDP in 2002 was around $102 billion, off 10.9% since 2001. The central government runs a noticeable deficit. With one-third to one-half of all Argentineans living in poverty, there is simply no way to redeem those bonds at par. The question is how bad is the loss going to be.

Argentina's latest offer not only shaves off 75% of the principle, it will repay the rest from proceeds of new bonds, $38.5 billion worth (who would buy them?). Moreover, these new bonds would be denominated in Argentine pesos rather than American dollars. This means that the debt can be inflated away by policies in Buenos Aires. It is not a serious proposal.

Yet, what do the creditors have as leverage? All they can do is negotiate, and make it painfully difficult for Argentina to issue new debt. That is hardly a way forward. Some losses will have to be accepted to salvage anything, and the key is to split the issue of the write-down and the currency. Simply put, let Argentina write off more debt if it agrees to keep future debt dollar-denominated. If it wants peso debt, make the government pay 80% or 90% of the principle. And interest rates are going to have to be capped -- the risk premium will be hefty and the credit cycle is tightening. Without a cap, Argentina is going to be right back in the same spot in just a few years.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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