TCS Daily


Emerging Markets are the Real Losers in Argentina's Triumph

By Desmond Lachman - March 17, 2005 12:00 AM

One can well understand the palpable feeling of satisfaction in many emerging market countries at Argentina's triumph over the IMF in its recent debt restructuring negotiations. After all, against all odds and against IMF advice, Argentina succeeded in persuading 75 percent of its creditors to agree to an unprecedented haircut on the restructuring of its sovereign external debt.

The question remains, however, whether emerging market euphoria will last once the dust settles. Rather, it seems more likely that other emerging market economies will find that the Argentine precedent will have complicated future sovereign debt restructurings. And by so doing, that precedent will have raised the future cost of emerging market borrowing in the international capital market.

Nestor Kirchner, Argentina's president, has every reason to bask in the success of his hard-nosed strategy in restructuring Argentina's US$100 billion sovereign debt. Three years after the disastrous collapse of Argentina's Convertibility Plan in December 2001, Kirchner's dogged patience has paid off in getting a large majority of Argentina's creditors to accept a 70 percent write-down of their claims. By so doing, not only has Kirchner succeeded in completing the largest sovereign debt restructuring on record, but he has done so on terms that are almost twice as favorable as those received in other recent such restructurings.

Argentina's success in restructuring its external debt owes little to the support or involvement of the IMF. Indeed, the IMF was only too happy to sit out Argentina's private sector debt negotiations after it had struck its own deal with Argentina in September 2003. That deal effectively ensured that Argentina would not default on its US$16 billion in IMF debt. In arriving at that lending arrangement, the IMF departed from its earlier well-established practice of not lending to a country in arrears with its private creditors, unless that country were negotiating with those creditors in good faith.

With its debt restructuring in place, Argentina is now well on the way to re-accessing international capital markets, which it sorely needs to sustain its post Convertibility Plan recovery. The S&P rating agency has already indicated its inclination to rate Argentina at B- following the completion of its debt restructuring, while Argentina is now to be included again in the various emerging market debt indices. At the same time, Argentina is now in a position to resume its IMF program should it so desire. These factors are all likely to encourage the return of a large amount of Argentine flight capital, which sought safety abroad as the financial crisis at home deepened.

While all now appears to be well and good for Argentina, one might ask how the Argentine precedent will affect other emerging market countries. Raising this question is not to suggest that other countries will quickly want to follow Argentina down the road to default, especially having seen the awful costs that the Argentine people have had to endure since Argentina defaulted. However, it is to suggest that in the event of a future Latin American default, domestic political considerations will force the affected country to be as hard nosed and as tight fisted in its debt negotiations with foreign creditors as was Argentina.

For example, in the hypothetical event that Brazil were to default, could President Lula politically agree to settle with Brazil's external creditors at very much more than the 30 cents on the dollar that Argentina extracted from its creditors? Or for that matter, could President Lula politically allow the IMF to become involved in Brazil's private creditor negotiations after Argentina so publicly rebuffed that organization in its successful private creditor negotiations? This would seem to be the case no matter how much better Brazil's capacity to pay was than Argentina's.

These considerations are likely to make external creditors very much more skittish than they would previously have been at the first sign of future trouble in a large emerging market economy. Faced with the prospect of a protracted debt renegotiation, which was now more likely to result in a ruinous settlement, would foreign creditors really want to be giving emerging market countries the benefit of the doubt?

In a less liquid market than we have today, foreign creditors will expect to be compensated more adequately than they were before for running the risk of a repeat of an Argentine-like situation. In so doing, emerging market economies will find that it is they who will be footing the bill for Argentina's spectacular triumph over the IMF.

The author is Resident Fellow, American Enterprise Institute.

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