<http://online.wsj.com/article_print/0,,SB110989847475270265,00.html>
The Wall Street Journal March 4, 2005 THE AMERICAS Argentina's Lessons for Global Creditors By MARY ANASTASIA O'GRADY March 4, 2005; Page A15 When Argentina defaulted on more than $80 billion in government debt in December 2001, the world saw tragedy. The International Monetary Fund saw opportunity. It posited that a market of more than 500,000 investors holding some 150 different bond issues would find the logistics of negotiating a settlement with a sovereign government impossible. Having lost political support for unrestrained lending to insolvent governments -- aka bailouts -- self-preservationists at the fund thought they had a new raison d'�tre: They proposed a new IMF-administered world bankruptcy court or, as advocates dubbed it, a sovereign debt restructuring mechanism (SDRM). Markets shuddered at the thought of a highly politicized multilateral agency holding sway over such a court. Supporters nonetheless argued that the Argentine case would prove the need. This week the jury came in. The completion of the Argentine bond restructuring offer, executed without the intermediation of the fund, makes the case that the SRDM is more an invention of an overgrown bureaucracy in search of a mission than a necessary addition to the world financial system. Indeed, the Argentine restructuring is good ammo for those who want to close the fund: 30 years after the collapse of the Bretton Woods agreement and the end of the balance-of-payments crises under a gold exchange standard, the IMF can still find no meaningful role other than as a political slush fund for the G-7 major industrial nations. The restructuring closes a shameful chapter in Argentine history. Losses for retail investors are huge -- bondholders will get about 34 cents on the dollar -- and the deadbeat government looks to have gotten away with the swindle of the century. Those who chose not to participate -- some 24% -- may now be stuck with very long-term, low-yield assets. That's the bad news. But 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. If this lesson is allowed to sink in, things could be looking up both for economic reform in poor countries and for greater stability in the world financial system. Without the IMF's politically motivated interference, either in bailouts or some bankruptcy court scheme, 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. There is little doubt that the wave of financial instability that rocked the globe in the late 1990s was fueled by the Clinton Treasury and its influence at the IMF, which ran around the world claiming to "rescue" bankrupted governments. In actuality, the Clintonistas fueled moral hazard by bailing out Wall Street cronies, who were up to their ears in high-yielding debt. >From offering perpetual "loans" under the illusion that developing countries can be bribed into making liberal economic reforms, to acting as an insurer for lenders to emerging-market governments, IMF intervention systematically increased, rather than reduced, risk and uncertainty in the world financial system. As policy makers began to finally acknowledge this problem of moral hazard at the start of the new millennium and bailouts fell out of favor, fund worthies seized on the idea of a SDRM, to facilitate debt default workouts much as bankruptcy courts do in the U.S. Wall Street, which loved the IMF when it was in the rescue game, hated the idea of the SDRM, rightly figuring that the G-7's politics would raise uncertainty and tend to favor bankrupted borrowers. Argentina, the largest and most complicated restructuring ever attempted, looked to be the perfect test case for a market solution. It is true that this week's closure comes more than three years after the moratorium. SDRM advocates might argue that an international court would have resolved the default more quickly. But it is notable that Argentina did not begin good faith negotiations until about a year ago and the delay was of a piece with the government's crumbling morality. It hardly seems appropriate or necessary for a third party, particularly one that has a political agenda, to attempt to mitigate the effects of this reality. One concern among economists is the potential for a kind of default contagion. Having seen the "success" Argentina has had in stiffing its creditors, there is some worry that other developing countries may try to copy it. A Financial Times story last week described members of the Philippine Congress advocating the Argentine way. The same risks, it must be noted, now hover over much Latin American debt. Yield spreads in emerging markets suggest that investors are so far not overly concerned about rippling default. It is not clear why. Some may believe that Argentina is an isolated case, others that the fund will go back to bailouts, at least selectively. The Philippines, with its Islamic unrest, is a perfect example of a candidate that the G-7 might like to prop up. Yet it was precisely such signals that produced the irrational exuberance in Argentine investing. To explain why markets pumped in money so liberally one only has to recall that the subtext of the IMF's good-housekeeping seal of approval on Argentina was that the fund would not permit a collapse. When Stanley Fischer stepped down as deputy managing director of the fund in 2001, he gave an interview in which he defended his liberal bailout strategies during his tenure at the fund. "Those who emphasize that IMF lending should be smaller and less frequent are implicitly saying there should be much less international lending and reliance on international capital markets," Mr. Fischer said. Well, not exactly. What we are saying is that capital flows should be proportional to the credibility earned by adhering to liberal economics, limited government and respect for institutions. But that makes demands. Why go there when IMF largess will paper over policy mismanagement? Closing down the IMF may be too much to hope for. But it is at least important to note that Argentina provides two priceless lessons. The first is that IMF largess not only damages reform momentum but also exacerbates risk. The second is that borrowers and lenders can work out bond defaults on their own, and when they do, incentives are likely to return to the emerging markets, raising accountability in governance. -- ----------------- R. A. Hettinga <mailto: [EMAIL PROTECTED]> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire' ------------------------ Yahoo! Groups Sponsor --------------------~--> Give underprivileged students the materials they need to learn. Bring education to life by funding a specific classroom project. http://us.click.yahoo.com/FHLuJD/_WnJAA/cUmLAA/TySplB/TM --------------------------------------------------------------------~-> -------------------------- Want to discuss this topic? Head on over to our discussion list, [EMAIL PROTECTED] -------------------------- Brooks Isoldi, editor [EMAIL PROTECTED] http://www.intellnet.org Post message: [email protected] Subscribe: [EMAIL PROTECTED] Unsubscribe: [EMAIL PROTECTED] *** FAIR USE NOTICE. This message contains copyrighted material whose use has not been specifically authorized by the copyright owner. OSINT, as a part of The Intelligence Network, is making it available without profit to OSINT YahooGroups members who have expressed a prior interest in receiving the included information in their efforts to advance the understanding of intelligence and law enforcement organizations, their activities, methods, techniques, human rights, civil liberties, social justice and other intelligence related issues, for non-profit research and educational purposes only. We believe that this constitutes a 'fair use' of the copyrighted material as provided for in section 107 of the U.S. Copyright Law. If you wish to use this copyrighted material for purposes of your own that go beyond 'fair use,' you must obtain permission from the copyright owner. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml Yahoo! Groups Links <*> To visit your group on the web, go to: http://groups.yahoo.com/group/osint/ <*> To unsubscribe from this group, send an email to: [EMAIL PROTECTED] <*> Your use of Yahoo! Groups is subject to: http://docs.yahoo.com/info/terms/
