Argentine debt restructuring
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| Argentine economic crisis (1999-2002) |
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Economy of Argentina |
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Argentina defaulted on part of its external debt at the beginning of 2002. Foreign investment fled the country, and capital flow towards Argentina ceased almost completely. Argentina was "left out of the world". The currency exchange rate (formerly a fixed 1-to-1 parity between the Argentine peso and the U.S. dollar) was floated, and the peso devalued quickly, producing massive inflation.
Large-scale debt restructuring was needed urgently, since the debt had become unpayable. However, the Argentine government met severe challenges trying to refinance its debt. The International Monetary Fund (whose part of the debt was not included in the default) became uncooperative, hypercritical and unwilling to recognize their share of blame. Other creditors (many of them private citizens in Spain, Italia, Germany, Japan and other countries, who had invested their savings and retirement pensions in debt bonds) denounced the default; the Italian government lobbied against Argentina in international forums. Vulture funds who had acquired sovereign debt bonds during the critical moments, at very low prices, pounced on the Argentine state asking to be repaid immediately.
The state had no spare money at the time, and the Central Bank's foreign currency reserves were almost depleted. (Moreover, whatever amount left was needed to control the availability of dollars in the local market, in order to prevent further devaluation of the peso.) For four years, Argentina was a pariah, effectively shut out of the international financial markets.
Even as the economic situation improved, the amount of the debt was still the largest defaulted debt in history (about 93,000 million USD), and Argentina was in no position to pay without sacrificing essential parts of its budget.
The Argentine government kept a firm stance, and finally got a deal by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value (25-35% of the original) and at longer terms. Among these bonds, some are indexed based on the future economic growth of Argentina.
The terms of the debt exchange were not accepted by some of the private debt holders (amounting to a quarter of the debt). In all likelihood, Argentina will continue to face challenges from them and from the IMF for years.
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Current situation
According to the June 2005 report by the Ministry of Economy, the total acknowledged debt of the Argentine state amounts to 126,466 million USD, down by 63,464 million from the first semester as a result of the restructuring process; of this, 46% is denominated in dollars, 36% in pesos, and 11% in euros and other currencies.
Debt bonds not exchanged (and therefore to be considered unpayable) account for 23,381 million USD, of which 12,688 million are already overdue. For the whole year 2005 Argentina must pay 9,473 million USD, and over 18,000 million in 2006. [1]
Disindebtment policy
The International Monetary Fund is considered a "privileged creditor", that is, debt payments to it were not suspended (except with previous agreement) and they did not suffer discounts. Since 2005 Argentina has shifted from a policy of constant negotiation with the IMF to refinance and postpone all payments, to a strategy of "disindebtment", which consists in paying in time with no discussion whenever possible, taking advantage of a large and growing fiscal surplus, with the acknowledged intention of gaining financial independence from the IMF. [2]
The Nobel Prize economist Joseph Stiglitz has repeatedly criticized the IMF and supported the Argentine strategies on the debt restructuring, but opposes the disindebtment policy, suggesting instead that the IMF should receive the same treatment as the other creditors. [3]
The main criticisms of disindebtment are, in the first place, that the large amounts of money used to pay off debt are made unavailable for productive purposes within Argentina; and second, that the funds do not come from fiscal surplus alone, but from the emission of new public debt at higher interest rates.
References
- Argentina Didn't Fall on Its Own (GlobalExchange.org)
- Argentina's debt restructuring: A victory by default? (Economist.com)
- Argentina: IMF slammed by own independent panel - A report by the Independent Evaluation Office of the IMF.
External links
- Banco Central de la República Argentina - Argentina's Central Bank website, with various economic statistics available on the fly.
- Interessengemeinschaft Argentinien e. V. (non-profit-association of creditors involved in the restructuring, based in Germany).
- Argentina and the IMF on the IMF website.
