Argentina's resetting the rules on sovereign bankruptcy
■"Many View Argentina's Comeback With Skepticism: Some Financiers and Bondholders Say Offer to Settle Huge Debt Is Far Too Little," by Paul Blustein, Washington Post, 4 March 2005, p. E1.■"Argentina Announces Deal on Its Debt Default: Creditors to Get at Best 30 Cents on Dollar," by Larry Rohter, New York Times, 4 March 2005, p. C3.
■"Argentina's Lessons for Global Creditors: Lend to deadbeats at your own risk," op-ed by Mary Anastasia O'Grady, Wall Street Journal, 4 March 2005, p. A15.
Argentina got more than three-quarters of its bondholders to agree to take 30 cents on the dollar, thus ending its default crisis that began in December 2001, when it stopped payments on $100 billion in debt—a record bankruptcy. Thirty cents is the worst deal yet offered by a major state in default, as the Russians at least offered 50 cents when they crashed in the late 1990s.
Is this a rule-set reset? "Lawyers, economists, underwriters and bond traders have all been speculating that Argentina's example may encourage other developing countries to act similarly." As the former Argentinian under secretary of finance and a key debt negotiator said, "The rules of the game have changed."
How so?:
Argentina chose almost from the start to break with many of the customary procedures in a debt renegotiation. Not only did it not seek an accommodation with the I.M.F. and the Group of 7, it presented a unilateral proposal to creditors, avoiding dealing with a steering committee and in the end largely imposed its terms on creditors, who were divided and fragmented.
Argentina could accomplish this in part because Argentinians themselves held almost 40% of the bonds, and because it's economy rebounded dramatically in the meantime, especially in agriculture. So foreign direct investment is flowing back in the country. This only underscores the importance of making sure Gap states have access to our markets for their agricultural exports.
Just as when the U.S. unilaterally rewrites some rules in security, Argentina is pissing off a lot of players in the Core. On average, international investors are suffering losses twice as big as they did in previous defaults in Russia and Ecuador. Of course, the Core's revenge is supposed to be a lack of FDI flowing into the transgressor's economy for many, many years, but this isn't happening with Argentina. The key is the budget surplus thanks to ag exports and keeping down the wages of public-sector employees. If the Core says, "We won't buy your public debt!" Then Argentina simply replies, "Fine, we're not floating any!"
So yeah, Argentina is getting away with it, and although their private companies will suffer, just as the people did with this bankruptcy, at least some real progress can be seen in the implicit A-to-Z global rule set on processing economically-bankrupt states. As O'Grady points out:
… the good news is that the world may have moved a step closer to a market-driven financial system where the costs of malfeasance are shouldered by those who borrow and lend rather than socialized through the International Monetary Fund.
In short, if pain is more directly connected to bad choices, then "lenders and borrowers will be forced to act more responsibly or suffer the consequences. As accountability increases, volatility and systemic risk are likely to decrease."
Point being, moral hazard should belong to the actors involved, not the world as a whole. If you don't want irrational exuberance, then don't make it look like the IMF bails states out no matter what.