Argentina in the red
Investors indignantly reject Argentina's offer for bond repayment. They would do well to reconsider, Hisham El-Naggar suggests from Buenos Aires
In the wake of the largest debt default in history, Argentina requested a 75 per cent reduction in payments for bonds estimated to be worth over US$80 billion. Not surprisingly, the proposal was balked at by investors stuck with non-performing Argentine bonds.
Argentina put its first offer on the table at the IMF-World Bank joint meeting in Dubai. While various options were discussed, Argentina offered to pay just 25 cents on the dollar for the outstanding bonds. Representatives of bondholders professed surprise and disbelief. Clearly they haven't been reading Argentine papers -- which predicted up to 80 per cent debt reduction.
The bonds are held by three different groups. The first are private individuals, including many who allowed themselves to be tempted by the prospect of double-digit returns. The second are institutional investors -- pension funds, mutual funds and some insurance companies -- who presumably knew what they were in for and assumed Argentine risk as part of a well-diversified international package. The third are privately owned Argentine pension funds, who claim they were strong- armed into buying risky government bonds.
Argentina negotiated an agreement with the IMF a couple weeks ago, which surprised observers -- and upset Wall Street -- with its leniency. Bond holders would do well to recall that the IMF had little choice in the matter. With access blocked to international markets since before the default and little prospect of it being restored any time soon, there is little incentive for Argentina to sign agreements it cannot possibly implement. A little help from the Bush administration -- with less at stake than many European countries -- strengthened Argentina's position. As a result, IMF "technicians" swallowed their pride and consented to terms which were less exacting than those required of Brazil, which hasn't -- so far at least -- defaulted.
Argentina would argue the deal was fair. The IMF is not injecting any money into the economy, and indeed Argentina agreed to pay interest on the billions it owes. As such, an undertaking to run a primary budget surplus -- a surplus before interest on foreign debt is calculated -- amounting to three per cent of its GDP is the most Argentina would consent to for the first year of the agreement, with the targets for the remaining two years to be negotiated later in light of actual growth. This compares favourably with the 4.5 per cent which recession- bound Brazil is being held to.
The terms of the agreement with the IMF allowed Argentine President Nestor Kirchner to claim victory. Earlier IMF insistence on a formal commitment to raise utility rates -- a point dear to the heart of the European-owned utility companies -- and to guarantee compensation to the mostly foreign-owned private banks for payments to litigious depositors were quietly dropped. The IMF, in what must be considered a first, even agreed to include poverty reduction as a valid criterion for later negotiations on fiscal policy targets.
In a surprising role reversal in Argentina, the agreement elicited little or no criticism from leftist circles, but was unfavourably received on the right. Some right-leaning commentators claimed the deal was tougher on Argentina than it appeared to be, and that the absence of second- and third-year fiscal targets would return to haunt the government. If so, the government and leftist commentators, hardly fond of agreements with the IMF anyway, were decidedly unfazed.
Wall Street didn't like the agreements for two reasons. First, it seemed like Argentina was getting away with its default, after failed attempts to meet impossible debt obligations caused the collapse of the previous government. Second, the fiscal surplus target was so "modest" it would leave little available to pay investors with non-performing Argentine bonds in their portfolios.
That, of course, is precisely why the agreement is convenient for Argentina. It promised the IMF its primary budget surplus would be three per cent. Three per cent -- minus the interest on foreign debt -- is all international bondholders can hope for, at least in the first few years.
Some bondholders refused to take Argentina's offer seriously, considering it only a negotiating ploy. However, President Kirchner planned to disappoint them. They should seriously consider accepting it, he warned, because later they may have to settle for even less.
Other bondholders are talking about settling their claims in non-Argentine courts, which they can do. But the judgements, however favourable to creditors, will prove next to impossible to enforce. With most public sector companies now privatised, there are few government-owned assets abroad that creditors can hope to seize.
Negotiating, a laborious prospect for both sides, is the only option at the moment. That, and perhaps gambling on bonds linked to future growth prospects might offer a chance at profits.
Meanwhile, domestic pressure is mounting. Local pension funds, many operated by foreign banks, have initiated a vast campaign to convince Argentines that future pensions are in danger. However, most have such bad reputations -- charging approximately 30 per cent commissions -- that the public merely yawned.
It would appear that even professional usurers have to learn the old adage that you just can't get water from a stone.
Al-Ahram Weekly Online : 2 - 8 October 2003 (Issue No. 658)
Located at: http://weekly.ahram.org.eg/2003/658/in3.htm