Argentina's Debt: Will the IMF Blink?


In the politically charged world of emerging-market debt restructurings, Peter Allen is no novice. As Bank of America's director of Latin America research, the 46-year old economist led talks with Argentina, Brazil, and Uruguay as those nations negotiated to restructure their debts under the so-called Brady Plan -- the system of rescheduled payments and economic reforms first laid out in 1989 under the auspices of then-U.S. Treasury Secretary Nicholas F. Brady. Now an independent consultant, Allen is the special adviser to the Argentina Bondholders Committee, which represents institutional investors holding $7.5 billion in defaulted bonds.

As Argentina and the International Monetary Fund (IMF) haggle over the terms of a new loan agreement, no group has more riding on the outcome than the bondholders on whom Argentina defaulted to the tune of $95 billion in December, 2001. Whatever money will be left over to pay creditors depends on the size of the primary budget surplus Argentina negotiates with the IMF. Argentine officials have hinged the presentation of a bond-restructuring plan on the successful rolling over of their country's $14 billion tab with the IMF (see BW, 9/15/03, "Argentina's Test of Wills with the IMF").

BusinessWeek reporter Joshua Goodman recently spoke with Allen about the continuing IMF negotiations and their impact on Argentina's repayment prospects. Edited excerpts of their conversation follow:

Q: How much leverage does Argentina have in its negotiations with the IMF?

A: It appears Argentina has a great deal of leverage. Everyone agrees that Economy Minister Roberto Lavagna played brinkmanship and won when Argentina negotiated its last IMF agreement in January. By getting a deal which basically exempted Argentina from the hard fiscal and structural reforms the IMF wanted, the IMF was basically forced to show its last card, which is that it doesn't want to be defaulted on. In that sense, it's clear that the IMF needs this deal as much or more than Argentina. The IMF can't risk going into its annual meeting [Sept. 25 in Dubai] with one of its largest aid recipients in default.

Q: What would happen if Argentina defaulted on its IMF debt?

A: We would be looking at one of the most fascinating case studies in international finance in generations. The IMF has always been the lender of last resort. If Argentina were to essentially turn its back on the IMF, that whole system would come into question.

Q: To what degree are the interests of private bondholders part of the discussions with the IMF?

A: It's hard to tell. We're spectators to this whole negotiation process, like everyone else. Unfortunately the IMF hasn't consulted bondholders on what they think of Argentina's proposal for a 3% primary fiscal surplus. But if they had, we would have told them that it's too little given Argentina's outstanding obligations.

Q: How would you characterize negotiations with Argentina over the restructuring of the defaulted bonds?

A: The only thing bondholders have been asking for all along is a meaningful dialogue with the government. So far that hasn't happened.

Q: But hasn't Finance Secretary Guillermo Nielsen met several times with bondholders?

A: Yes, but he has never asked what bondholders would like to see in an eventual swap. Most of the meetings consist of unilateral promises by the Argentine government, which only delay real progress.

Q: It has been reported that Argentina will ask investors to be repaid at somewhere between 20 cents to 40 cents on the dollar. Does that seem reasonable?

A: If Argentina gets a "haircut" that big, it would completely [alter] the entire spectrum of debt forgiveness, both public and private, as we know it. During its Brady negotiations, the net present-value haircut Argentina received amounted to a 60- to 70-cent repayment on the dollar.

The largest haircut in private-debt talks ever registered was around 50%, and that was for highly indebted, low-income countries, like those in sub-Sahara Africa. Argentina, even after the devaluation, is still a middle-income country, compared to the rest of the world.

Q: Would the government's proposal that a restructured bond be pegged to Argentina's future growth appease bondholders?

A: The key to any fixed-income instrument is that it must be liquid and tradable. The problem with a bond whose coupon fluctuates according to gross domestic product is that it's too complex -- nobody knows what GDP will be, so you can't determine what the income at maturity 10, 15, or 20 years from now will be. Plus, from the markets' standpoint, the repayment risk generated by GDP performance is already worked into the price.


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