 tock
markets plummeted yesterday, with much of the blame going to Argentina.
Here's what happened.
The sharp
decline in Argentina's financial markets over the last week accelerated
Monday morning on default concerns. The price on the FRB Brady bond
fell from 68 on October 22 to below 55 on October 29.
A Bloomberg
story on Monday morning began: "Argentina signaled it would default
on at least $38 billion of debt held by international investors
when it hired Merrill Lynch & Co. to help renegotiate the terms
of the securities. Bonds tumbled." The characterization as a "default"
will take some time to sort out.
Later Monday
morning, Argentina's spokesman said that it did not intend to dollarize,
default or devalue. Yet it seems decidedly harmful to rule out dollarization,
which is the logical exit from a disfunctional currency board.
Economy Minister
Domingo Cavallo spoke on TV Sunday night, saying the latest debt
restructuring would still be voluntary. Recall that in June Argentina
conducted a large bond swap which, in simple terms, offered higher
interest rates and longer maturities in return for up-front cash
relief. The swap added substantially to the net present value of
Argentina's debt, but allowed Argentina and the IMF to project an
improvement in the fiscal deficit.
Whereas the
May operation was dubbed a swap (in Spanish, canje de deuda),
the proposed operation is being termed a restructuring (restructuracion.)
Argentina hasn't announced the details.
Discussions
on the internal debt in recent weeks focused on achieving a much
lower interest rate in return for a pledge of dedicated tax revenues.
It now seems that they want to extend this concept to external creditors.
It hasn't been clear whether such a pledge is feasible given the
covenants in other bonds. A revenue pledge would not be of much
interest to external creditors, so it is not clear how long the
"voluntary" label for the operation will stay attached.
When might
Argentina default? It's hard to say. Although data on debt is scanty,
it appears Argentina faces substantially smaller amortization payments
in November through January than it did in August before the bailout.
It will be hard to point at any specific payment and say "we can't
make that one." In August, Argentina was facing a eurobond payment
of $525 million — big — on September 3. After extended
discussions with the U.S. Treasury, the IMF gave Argentina a huge
new bailout with few conditions in time to make payments on schedule.
How far will
it extend? Expect substantial contagion. A restructuring process
in Argentina makes it more difficult for other developing countries
to get capital. This lowers their growth rate, making their debt
more burdensome. In the evolution of the 1982 debt crisis, countries
fell into a "restructuring" process one by one over a period of
years. Later, it was termed a lost decade.
|
