from Follow the Money

The IMF has refused to bailout bond holders before Argentina!

September 21, 2004 2:46 pm (EST)

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Adam Thomson of the FT has an interesting article arguing that Argentina’s bond restructuring could succeed if Argentina is willing to offer bondholders 30 cents on the dollar, only a bit more than the 23-25 cents it already has said it will offer. Since Argentina has about $100 billion in outstanding bonds (and other, similar debt), Thomson is arguing that Argentina could pull off its restructuring by pleding another $5 billion in cash and discounted future cash flow.

That feels about right. The chances of a sucessful restructuring would go way up if Argentina’s offer turns out to be a bit above the current market price of its debt. Bondholders have not gotten much out of Argentina’s recovery, and a succesful restructuring would increase their upside should Argentina’s strong recent economic performance continue. Alas, it is not yet clear that Argentina will sweeten its offer, and even if it does sweeten its offer, it is likely to have a lower participation rate and face more holdout litigation than has been typical of other recent restructurings.Thomson, though, includes an assertion in his article that is false, though it reflects a common (mis)perception:

"Argentina’s tactics have shown that when investors buy sovereign bonds they are in effect lending without security or collateral, without the ability to enforce their contract and without the ability to seize assets. Until now this did not matter much because investors knew that IMF bail-outs would always provide the money to pay bondholders back. Argentina’s approach changed all that, and the market is struggling."

The first sentence is accurate: it is hard to seize a sovereign’s assets. The second sentence is wrong. Remember Russia? OK, Russia did not restructure its eurobonds, but it certainly restructured soveriegn debt held by foreign investors -- both its ruble denominated GKOs and its dollar denominated London Club syndicated loans, which had been repackaged and sold into the markets. Plus, Pakistan, Ukraine and Ecuador all restructured their Eurobonds before Argentina defaulted.

Indeed, one the biggest myths around is that IMF bailouts largely go to pay bondholders. Bonds are long-term obligations, and in most case, shorter-term creditors, not long-term creditors, are the ones who get bailed out. Take Argentina: a run by domestic bank deposits overwhelmed the $10 billion or so net financing that the IMF provided in 2001, and accounted for most of Argentina’s reserve losses. That is why so many bonds are around that need to be restructured: only $7 billion or so of Argentina’s large -- initially above $90 billion -- stock of international bonds came due in 01, and had a chance to get out! The IMF never has provided enough funds to a crisis country to let everyone with a financial claim get out.

One other point. Thomson argues that Economy Minister Lavagna’s hard-nosed negotiating tatics played a big role in Argentina’s expected ability to win bigger concessions from its creditors than other debtors. Maybe. But Argentina also ended up with a bigger debt problem than other emerging economies, and thus in a sense had to seek larger than average concessions. Argentina entered into its crisis with a debt to GDP ratio of around 50%, and a massively overvalued exchange rate. A large real depreciation was needed to close Argentina’s current account deficit, and the real depreciation effectively doubled its debt to GDP ratio. Argentina’s debts were mostly in dollars and stayed fixed at @ $140-150 billion (or would have, if Argentina had not pesoized some of its sovereign debt), and GDP collapsed from $280 to @$150 billion. On top of that, bailing out the domestic banking system added another $20 billion or so to Argentina’s debt. (All numbers are ballpark -- i have not gone back and checked them carefully, the precise numbers should be buried somewhere in this IMF document). Tatics matter, but the underlying economic reality that Argentina has too much debt also has helped Argentina’s case.

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