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Business Week, 29 October 2001 (annotations from… another time and place):
Just about the only thing left standing between Argentina and default is the country’s strong-willed Economy Minister, Domingo Cavallo. Every time it looks as if cash-strapped Buenos Aires is going to concede defeat, Cavallo manages to pull off another last-minute save. In May, he persuaded foreign investors to swap $30 billion worth of Argentine treasuries for paper of longer maturities and higher interest rates.
Now, Cavallo is trying a similar move with local pension funds and banks, a number of which are foreign- owned. Yet this time, he expects domestic bondholders to tender securities carrying rates as high as 26% in exchange for new ones with rates as low as 7%–hardly a lucrative proposition and a sign that the government is increasingly desperate. Officials claim the transaction, which could encompass more than $10 billion worth of paper, is voluntary. Indeed, local banks and pension funds may be wagering that an orderly restructuring–which is what the debt swap really is–is preferable to a messy default that would leave investors much worse off. Yet in the view of S&P, the government’s plan amounts to a “selective default.”
Indeed, to many, Cavallo’s actions are a futile attempt to postpone the inevitable. To its credit, the government has made progress toward its goal of erasing a pernicious fiscal deficit by pushing through draconian cuts in public-sector salaries and pensions. But these increasingly potent doses of austerity have stoked social unrest and turned voters against President Fernando de la Rua and his ruling Alliance coalition. And, according to current projections, Argentina still faces a $2.1 billion budget shortfall in the fourth quarter and a $4.3 billion gap for all of next year. “It’s clear that the fiscal targets won’t be reached without some sort of outside assistance,” says Pablo Guidotti, a vice-economy minister under former President Carlos Menem.
Within two months of this article being written, Argentina said it would begin suspending payments on its debt.
The thing is, FT Alphaville has long pointed to the similarities between Argentina and Greece, mostly as a broad warning of the consequences of inaction. What we never expected was to see Europe following the script so blindly, so completely.
Eerie really.
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And the beat goes on
Argentina is still setting sovereign debt precedents by the way. In the legal sense of the word. We would point to Tuesday’s landmark ruling in a US appeals court that holders of restructured Argentine bonds will not be able to recover assets from the country’s central bank (its deposits are at the New York Fed). Then on Wednesday comes the UK supreme court’s judgement that British courts can be used to press recovery claims allowed by New York courts, because of a sovereign immunity waiver within the restructuring agreement. Lord Phillips was not exactly decorous on the nature of the appellant:
The appellant ("NML") is a Cayman Island Company. It is an affiliate of a New York based hedge fund of a type sometimes described as a "vulture fund". Vulture funds feed on the debts of sovereign states that are in acute financial difficulty by purchasing sovereign debt at a discount to face value and then seeking to enforce it…
…but nevertheless, it’s a precedent, and makes it easier for bond investors to seek recovery on sovereign assets held in Europe and accessible from UK courts.
So what kind of sovereign would have most of its foreign assets in Europe, do you think?
Related links: Dithering risks creating the Argentina on the Aegean – FT The humble Greek (and Argentine) depositor - FT Alphaville
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