Argentine debt restructuring
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| Argentine economic crisis (1999–2002) |
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Economy of Argentina |
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Argentina went through an economic crisis beginning in the mid-1990s, with full recession between 1999 and 2002; though it is debatable whether this crisis has ended, the situation has been more stable, and improving, since 2003. (See Economy of Argentina for an overview.)
Argentina defaulted on part of its external debt at the beginning of 2002. Foreign investment fled the country, and capital flow towards Argentina ceased almost completely. Argentina was "left out of the world". The currency exchange rate (formerly a fixed 1-to-1 parity between the Argentine peso and the U.S. dollar) was floated, and the peso devalued quickly, producing massive inflation.
Large-scale debt restructuring was needed urgently, since the debt had become unpayable. However, the Argentine government met severe challenges trying to refinance its debt. The International Monetary Fund (whose part of the debt was not included in the default) became uncooperative, hypercritical and unwilling to recognize their share of blame. Other creditors (many of them private citizens in Spain, Italy, Germany, Japan and other countries, who had invested their savings and retirement pensions in debt bonds) denounced the default; the Italian government lobbied against Argentina in international forums. Vulture funds who had acquired sovereign debt bonds during the critical moments, at very low prices, pounced on the Argentine state asking to be repaid immediately.
The state had no spare money at the time, and the Central Bank's foreign currency reserves were almost depleted. (Moreover, whatever amount left was needed to control the availability of dollars in the local market, in order to prevent further devaluation of the peso.) For four years, Argentina was a pariah, effectively shut out of the international financial markets.
Even as the economic situation improved, the amount of the debt was still the largest defaulted debt in history (about 93,000 million USD), and Argentina was in no position to pay without sacrificing essential parts of its budget.
The Argentine government kept a firm stance, and finally got a deal by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value (25–35% of the original) and at longer terms. Among these bonds, some are indexed based on the future economic growth of Argentina.
The terms of the debt exchange were not accepted by some of the private debt holders (amounting to a quarter of the debt). The IMF used to lobby for these holdouts, but its position has been greatly weakened by the anticipated payment made in January 2006 (See below).
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[edit] Current situation
In the June 2005 report by the Ministry of Economy, the total acknowledged debt of the Argentine state amounted to 126,466 million USD, down by 63,464 million from the first semester as a result of the restructuring process; of this, 46% was denominated in dollars, 36% in pesos, and 11% in euros and other currencies. Due to the full payment of the IMF's debt (see below) and several other adjustments, as of January 2006 the total figure decreased to 124,300 million USD.
Debt bonds not exchanged (and therefore to be considered unpayable) accounted for 23,381 million USD, of which 12,688 million were already overdue.
Formed in November of 2006, The American Task Force Argentina, or ATFA’s ultimate aim is to bolster the stability of global credit markets; work toward a suitable outcome for remaining creditors; ensure the integrity of U.S. law; and strengthen crucial bilateral relations between the United States and Argentina.
[edit] Disindebtment policy
During the restructuring process, the International Monetary Fund was considered a "privileged creditor", that is, debt payments to it were not suspended (except with previous agreement) and they did not suffer discounts. In 2005 Argentina shifted from a policy of constant negotiation with the IMF to refinance and postpone all payments, to a strategy of "disindebtment", consisting in paying in time with no discussion whenever possible, taking advantage of a large and growing fiscal surplus, with the acknowledged intention of gaining financial independence from the IMF. [1]
The Nobel Prize economist Joseph Stiglitz repeatedly criticized the IMF and supported the Argentine strategies on the debt restructuring, but opposed the disindebtment policy, suggesting instead that the IMF should receive the same treatment as the other creditors. [2]
The main criticisms of disindebtment were, in the first place, that the large amounts of money used to pay off debt were made unavailable for productive purposes within Argentina; and second, that the funds did not come from fiscal surplus alone, but from the emission of new public debt at higher interest rates.
The Bank of New York was appointed by Telecom Argentina as trustee, registrar and paying and transfer agent for its $1.5 billion debt restructuring. "The transaction was Argentina's largest corporate debt restructuring to date", according to the Bank of New York November 3, 2005 press release. The restructure involved the exchange of $2.8 billion in outstanding debt for newly issued exchange notes and cash; "As the settlement agent in the transaction, The Bank of New York received and processed electronic and manual instructions from investors holding bonds in Euroclear, Clearstream, the Depository Trust Corporation (DTC), and from creditors holding debt in physical form." [3]
Euroclear and Clearstream also managed debt restructuring for the Argentine government. [4]
In total, 38.9% of the debt was exchanged through Euroclear, 38.1% through the Caja de Valores (Argentinian clearing house), 20.1% through Clearstream and 2.1% through US based Depository Trust Corporation. [5] The Bank of New York acted as the exchange agent between the clearing-house and debt holders [6]. Minister of Economy Domingo Cavallo declared that investigations were on to see if these clearing houses had not committed any irregularities [7].
[edit] Anticipated payment
On 15 December 2005 President Kirchner announced his intention of liquidating all the remaining debt to the IMF, in a single payment of 9,810 million USD, initially planned to take place before the end of the year (a similar move had been announced by Brazil two days before, and it is understood that the two measures were to be coordinated).
Argentina made some minor payments beforehand, but the main one, for about $9,534.8 million, was delayed for accounting reasons and paperwork, and was finally made on 3 January 2006. The debt was in fact denominated in Special Drawing Rights (a unit employed by the IMF and calculated over a basket of currencies). The Argentine Central Bank called on the Bank for International Settlements in Basel, Switzerland, where a part of its currency reserves were deposited, to act as its agent. The BIS bought 3,781.7 million SDR (equivalent to about 5,417 million USD) from 16 central banks and ordered their transfer to the IMF. The rest (2,874 million SDR or 4,117 million USD) was transferred from Argentina's account in the IMF, deposited in the U.S. Federal Reserve.
The payment served to cancel the debt installments that were to be paid in 2006 ($5,082 million), 2007 ($4,635 million), and 2008 ($432 million). This disbursement represented 8.8% of the total Argentine public debt and decreased the Central Bank's reserves by one third (from $28,045 to $18,575 million). According to the official announcement, it also saved on interests for about $1,000 million. The actual savings amounted to $842 million (since the reserves that were in the BIS were until then receiving interest payments).
The initial announcement was made in a surprise press conference that quickly became crowded. President Kirchner said that, with this payment, "we bury an ignominious past of eternal, infinite indebtment". Many of those present later called the decision "historic". The head of the IMF, Rodrigo Rato, saluted it, though remarking that Argentina "faces important challenges ahead". United States Secretary of the Treasury John Snow said that this move "shows good faith" on the part of the Argentine government.
The day after the announcement, the price of the U.S. dollar in pesos jumped and then stabilized on 3.07 pesos (a 1.3% devaluation); the Central Bank was forced to sell $270 million in the market. The peso-denominated Argentine debt bonds sunk by 3% and the Buenos Aires Stock Exchange lost 1.9%. After the initial surprise, reactions to the move were mixed, and the markets became quiet in a few days. Both President Kirchner and Minister of Economy Felisa Miceli assured the public that the measure would have a "neutral effect" in the economy, since the Central Bank's dollar reserves are still enough to buy the whole monetary base.
Some analysts pointed out that the payment was more a political move than a thought-out economic strategy, but disagreed on their assessment of its long-term consequences. Minister Miceli said that the policy of accumulation of foreign currency reserves would continue and that the Central Bank would attempt to buy all the dollars that entered the market through international trade in 2006.
The Central Bank's reserves surpassed their pre-payment levels on 27 September 2006. As a result of its aggressive buying strategy, the exchange rate increased 8% in one year, reaching 3.12 pesos per dollar. [8]
[edit] Allegations of use of unpublished accounts of Clearstream
Main information: Clearstream scandal
As a clearing house, Clearstream has a "dominant position" in Europe, according to the European Commission. Funds composing the private and public Argentine debt have transited through Clearstream, which is inevitable because of its quasi-monopoly situation. However, according to Revelation$ (2001), written by reporter Denis Robert and Ernest Backes, some Argentine funds have transited through an illegal system of non-published accounts used by Clearstream; the Citibank in particular, which held a large part of the private Argentine fund, had numerous unpublished bank accounts in Clearstream. This illegal system of non-published accounts makes of Clearstream, according to several judges as Eva Joly and Renaud van Ruymbeke, European members of Parliament (MPs) such as Harlem Désir, Glyn Ford and Francis Wurtz, and Attac NGO, a major actor of the underground economy, through which global tax evasion and money laundering may be investigated. Henceforth, Clearstream is a major key in the understanding of the evaporation of the Argentine funds which led to the economic crisis. As Luis Corsiglia, president of the Caja de Valores, which acted as the Argentine clearing-house intermediary between the funds and Euroclear, Clearstream & DTC, "Argentine can't succeed in balancing credit and deficit, because of a too high tax evasion" . Critics alleged that Clearstream has been instrumental in this massive tax evasion which accounts for a large part of the 2001 economic crisis.
[edit] Endnotes
- ↑ "¿Qué sabes de la Bolsa? (entrevista con Luis Corsiglia, presidente de la Caja de Valores", Revista Facultades, ?.
[edit] References
- Denis Robert and Ernest Backes, "Revelation$" (2001) about the Clearstream scandal
- Argentina Didn't Fall on Its Own (GlobalExchange.org)
- Argentina's debt restructuring: A victory by default? (Economist.com)
- Argentina: IMF slammed by own independent panel - A report by the Independent Evaluation Office of the IMF.
- Full anticipated payment to the IMF: news reports in Reuters, Forbes, Miami Herald, Buenos Aires Herald, La Nación (in Spanish), La Capital (in Spanish), Página/12 (in Spanish)
[edit] External links
- Banco Central de la República Argentina - Argentina's Central Bank website, with various economic statistics available on the fly.
- Interessengemeinschaft Argentinien e. V. (non-profit-association of creditors involved in the restructuring, based in Germany).
- Argentina and the IMF on the IMF website.
- Associazione per la Tutela degli Investitori in Titoli Argentini/Task Force Argentina (pressure group based in Rome, representing the interests of default bondholders in Italy).
- American Task Force Argentina (pressure group based in Washington, D.C., representing the interests of institutional default bondholders in the U.S., and co-chaired by Robert J. Shapiro, former U.S. Undersecretary of Commerce in the Clinton Administration, and Nancy Soderberg, member of the National Security Council under Clinton).
- Global Committee of Argentina Bondholders (global association of Argentina bondholder groups and committees from around the world, representing holders of over US$39 billion in debt. It includes more than 500,000 retail investors and more than 100 institutions, banks, partnerships and committees).
