Learning from Argentina’s Crises

Learning from Argentina’s Crises

Present by: Masoud Jabbari

Supervisor: Dr. Ali Madanizadeh

Sharif Macro-economics research group

Fall-2013

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REVIEW: ARGENTINA’S SOVEREIGN

DEBT RESTRUCTURING

• in December 2001 Argentina collapsed and ceased all debt payments

• Argentina’s total public debt grew from 63% of GDP in late 2001 to 150% of GDP in early 2002

• Resolving includes:

• adopting policy changes

• obtaining official emergency financial assistance from IMF

• undertaking debt restructuring

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ARGENTINA’S SOVEREIGN DEBT

• For most of the 1990’s Argentina was seen as a model of successful policy making by pegging its exchange rate to the dollar under a currency board type arrangement in 1991

• Argentina ended hyper-inflation

• Reducing inflation rate to single-digit level

• The banking sector was strengthened considerably, in the part because of an increase in foreign bank entry

• A 1998 World Bank financial sector review rated Argentina second only to Singapore among emerging markets in the quality of its bank supervision

• Greater economic stability attracted foreign investment inflows, contributing to an acceleration in economic growth

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RECOVERING DEFAULTED SOVEREIGN

DEBT

• 1- Adjusting Policies

• * correcting fiscal and current account deficits and

structural imbalances involve banking sector, utility

regulation and federal-provincial fiscal relation

• * return of robust growth, increased tax and decrease

expenditure

• 2- emergency IMF financing

• 3- restructuring debt to achieve long-term financial

sustainability

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ARGENTINA’S RELATIONSHIP WITH

THE IMF

• Argentina had good relationship with IMF with strong support of the USA

• IMF lending typically is done with a clear understanding that such challenging reforms will be accomplished

• IMF can not dictate policy

• IMF can exert leverage by having the option not to lend

• IMF can make role in restructuring debt indirectly by continuing lend to a country in default

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ARGENTINA’S RELATIONSHIP WITH

THE IMF

• IMF policy allows fund lending in circumstances in

which:

• (i) Prompt fund support is considered essential for the

implementation of the member’s adjustment program

• (ii) the member is pursuing appropriate policies and is

making a good faith effort to reach a collaborative

agreement with its creditors

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RECOVERING DEFAULTED

SOVEREIGN DEBT

• While Argentina wouldn’t able to pay its debt in full,

what amount and condition would satisfy both sides?

• Countries in default reach a voluntary agreement with

creditors or by litigation

• recovery rate have varied and Latin America

restructurings ranged from 0%-45% reduction in the

nominal value of debt

• Overall debt burden must be consistent with the

country’s capacity to make payements

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ARGENTINA’S DEBT RESTRUCTURING

STRATEGY

• only 53% of Argentina’s debt was carrying burden of

restructuring so the write-down had to be huge

• creditors argument: Argentina was not absolved of its

responsibility to negotiate

• Having 152 bonds denominated in 7 currencies and

governed by 8 legal jurisdictions

•

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ARGENTINA’S DEBT RESTRUCTURING

STRATEGY

• Argentina first of all put off private bondholders

while negotiating with the IMF until March 2003

• not all debts would be treated equally

• Negotiation with creditors remained stalled and

Argentina entered into a new controversial 3 years

$12.6 billion with IMF

• soft agreement: Argentina’s proposal was to commit

only a 3% of primary fiscal surplus (Brazil was 4.25%)

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THE DUBAI PROPOSAL

(SEPTEMBER 22, 2003)

• interpretation: paying 25 cents on the dollar of

principal value of the debt with no recognition of PDI

• 90% reduction in the value of bond (NPV)

• IMF suggestion: Argentina could master a higher

primary surplus and make good portion of its debts

• Dubai proposal resisted by creditors groups

• IMF delayed the first quarter review program

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THE DUBAI PROPOSAL


• Argentina continue to meet its macroeconomics targets

• IMF pressured Argentina over its lack of good faith

effort in debt restructuring negotiations and failure on

microeconomics reforms:

• utility pricing

• banking regulation

• restructuring in provincial-federal arrangements

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THE DUBAI PROPOSAL


• IMF required that Argentina negotiation be acceptable

to at least 80% of bondholders by September 2004

• Argentina wield its own leverage against lenders

• IMF with $15 billion investment in Argentina had its

own interest in keeping Argentina from falling into

arrears

• Final Result: Argentina accepted to negotiate formally

with all creditors but it did not change its fundamental

offer

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THE FINAL BUENOS AIRES OFFER

• Negotiations began in April 2004

• Bondholders again contested the process and

Argentina cancelled further talks and tabled its final

offer on June 1

• Bondholders rejected the unilateral offer because

Argentina failed its IMF commitment to make a good

faith effort to reach a collaborative agreement

•

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• Argentina differed its offer: recognized PDI through

the end of June 2004 so at least 70% of bondholders

agreed

• the debt wright off would still 75% of outstanding

debt but on a present value not nominal.

• Argentina anticipated issuing $43.2 dollars in new

bonds with minimum 70% participation rate.

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• Argentina anticipated issuing $43.2 dollars in new

bonds with minimum 70% participation rate.

• 1- Discount Bond ($19.9 billion): 30 years bond with a

63% reduction in principal value

• 2- Par Bonds: 35 years bond at face value

• 3- Quasi Par Bonds: 42 years bond with undefined

reduction in principal

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IMF PROGRAM SUSPENSION

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• Argentina announced it would suspend its IMF

agreement

• for the short term Argentina needed time and freedom

for IMF conditionality to finish negotiations with

creditors more than it needed IMF financing

CHRONOLOGY OF EVENTS

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• 1980’s: economic instability including Latin American

debt crisis and hyper inflation

• 1989: A major structural adjustment program: tax

reform, privatization, trade liberalization,

deregulation, adoption of a currency board

• 1991: Congress enacts the convertibility law of peso to

dollars at a 1-1 fixed rate


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• 1991-1994: strong economic growth and successful

currency board

• 1995: Mexico’s peso devaluation and capital outflow of

emerging markets and GDP declined by 2.8%

• 1995-1999: real appreciation of US dollar and so Peso

• 1996-1997: Renewed period of Argentina’s economic

growth, but account deficits and debt measure worsen

• July 1997: East Asian financial crisis


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• 1998: Financial crisis moves to Russia and then Brazil

and Argentina enters a recession and unemployment began

to rise

• 1999(Jan): Brazil devaluated its currency, hurting

Argentina’s exports, 30% of which were with Brazil

• 1999(Sep): Congress committed government to large

reduction in federal and provincial spending

• 1999(Dec): New President seeked assistance from IMF


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• 2000(Mar): IMF agreed to 3 years $7.2 billion with

Argentina conditioned on a fiscal adjustment and

assumption of 3.5% GDP growth in 2000 (0.5% in actual)

• 2000(May): $1 billion budget cut to bring renewed

confidence in economy

• 2000(Sep): IMF conclude an Article for required annual

review of member country economics

• 2000 (Oct): President decision not to replace two cabinet

member linked to a Senate bribery scandal


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• 2000(Dec): Government announced a $40 billion

assistance package by IMF

• 2001(Jan): poor performance prompt IMF to augment the

agreement by $7 billion and assuming 2.5% GDP growth

(-0.5% in actual)

• 2001(Mar): replacing the minister of Economy

• 2001 (Jun): $29.5 billion voluntary debt restructuring and

short-term debt exchanged for longer maturity and higher

interest rate


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• 2001(Jun): allowing a 7% devaluation in hope to

improving Argentina’s international competitiveness

• 2001(Jul) A balanced budget planned but the market

reacted negatively

• Unions call a nationwide strike to protest austerity plan

• Congress passes Zero Deficit Law

2001(Sep): IMF increased lending commitment by $7.2

billion


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• 2001(Oct): provincial bonds used to pay as public

salaries

• opposition party wins congress elections

• 2001(Nov): Argentina exchanged $60 billion of bonds

with an average interest rate of 11-12% for extended

maturity bonds with 7% interest rate

• Run on the banks, president impose $1000 per month

limitation on personal bank withdrawals


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• 2001 (Dec): protests begin over withdrawal limitations

• IMF withhold $1.24 billion loan installment

• Argentina announced it can no longer guarantee payment on foreign payment

• unemployment reached near record 18% and unions called nationwide strike

• supermarket looting begins

• rioting spreads to major cities and Minister of Economy resigned


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• President resigns leaving 28 people dead

• liquidity standards for banks are relaxed and new economic plan: 1) suspension of payments on public debt

2) New jobs creation program 3) creation of a new currency to begin circulated in Jan 2002 and not to be convertible to the U.S dollar

* new president resigned


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• 2002(Jan): Duhalde new president blamed Argentina’s

problems on the free market system and vows to change

economic course

• devalue peso by 29%, converting all debts up to $100,000

to pesos, controlling capital and bank account, new tax on

oil to compensate creditors losses, renegotiating public

debt, and a balanced budget

• bank holidays extended two extra days, the currency

market opened and peso falls immidiately to 1.7 per dollar

THANKS

FOR

YOUR

KIND

ATTENTION

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Documents

Learning from Argentina’s Crises