The Lincoln Plawg - the blog with footnotes

Politics and law from a British perspective (hence Politics LAW BloG): ''People who like this sort of thing...'' as the Great Man said

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Sunday, March 07, 2004

Argentina IMF default: I don't smell crisis

The MO round here is pretty simple: thanks to the work of others, pro and am [1], I get to copy taste a whole bunch of stuff, a lot of which is fascinating or important to read, and almost all of it useless for me to blog: as the man said, It don't mean a thing if it ain't got that swing [2].

The Argentinian debt business ain't [3]. Not yet. It's certainly important - politically, as a challenge to US authority by an increasingly truculent Néstor Kirchner (coinciding with interesting times in Venezuela and oft-occupied Haiti); and also economically [4].

But (from a pitifully incomplete survey of the evidence available) I don't get the feeling that any party to the dispute is looking to escalate any time soon.

The latest crunch-that-won't-be is a payment of $3.1 billion due to be made to the IMF on Tuesday (Reuters March 7); Kirchner is saying that the payment will not be met, unless the IMF, now under the leadership of acting head Anne Krueger, bends on four new demands it has made (on top of the (thought by some) rather lax agreement of last year).

(The four demands relate to the $88 billion sovereign debt due to private lenders.)

More details at La Nación: here, here, here, here, here, here, here, here and here.

  1. Which goes unacknowledged (when used) only by mistake or sheer bloody laziness on my part!

  2. Pros have to write, swing or not, of course. That's partly why they get paid.

  3. Speaking purely personally, of course. Vive la différence!

  4. I'm no expert. But I'd like to be walked through exactly what the risk of an Argentinian default is. The vast bulk of sovereign debt is owed to private creditors, and has been in default since 2001; the big hit to the value of such debt obviously came in the early days. And the market for Third World debt has obviously survived.


I was nudged into writing on the topic by a piece in Atrios under the hed
Hurray for Default!
I thought for a moment it might be satire; but I think he's serious. President Lula is Benjamin Strong compared to this:
Lending to plenty of countries is supposed to be risky, which is why the countries pay a huge risk premium to borrow.

It ain't necessarily so. My recollection is that the sovereign risk premium (the number of basis points a bond yields over the corresponding US government bond) on Argentinian bonds was fairly small before the 2001 default. Currently, the Argentian premium is uniquely huge (around 5000 BPs - 50 percentage points).

So the cry goes out:
Stiff your creditors, I say. And, don't worry, they'll be back to lend you more money in a few years.

Take that under advisement.

Huey Long on speed? What a way to Share the Wealth! Hey, let's IM Kerry stat... Apparently, it's Do what we say, not what we do:
...and, no, this isn't an option for the US. The US is not Argentina (yet). US default would completely nuke the international financial markets.

Which, as we know, are required to play a vital role: as a bottomless pit to dispense charity to feckless and ungrateful populists throughout the rest of the world.

I should coco!


Sovereign debt default just happens to be a topic which has fairly good online coverage. (For "sovereign debt" default filetype:pdf Mr Google produces nearly 6,000 items, including dupes.) My searcher's nose tells me there's some good stuff in there, especially for those (not me) with decent maths.

The Argentinian situation doesn't impel me to rush right in, though.

UPDATE (March 11)

I called one right! (Bound to happen one day...) Kirchner and the IMF both backed off; he paid, they withdrew their extra conditions on the facility agreed last September: pretty soon, therefore, yesterday's payment will return whence it came. (Thus spake the Economist and Guardian [1], at least.)

Part of the deal is that Argentina will negotiate with the private sector creditors: much trickier. But the country, despite a recent growth spurt, does not have much in the way of disposable moolah (imagine a populist like Kirchner using free cash to pay foreign fat-cats rather than help his own poor!), and the external legal action to attach assets is doomed to be around as successful as the quest for the Holy Grail.

Seems to me that the country can neither go forwards nor back on the debt issue: the IMF keeps it on life-support, the banks whistle for their money and Kirchner stays popular without really trying.

There was a time, around 1914, when Argentina was, in terms of per capita national income, one of the richest countries on earth...

  1. And La Nación here, here and here.

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