Learning from Argentina’s Crises
Transcript of Learning from Argentina’s Crises
Learning from Argentina’s Crises
Present by: Masoud Jabbari
Supervisor: Dr. Ali Madanizadeh
Sharif Macro-economics research group
Fall-2013
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REVIEW: ARGENTINA’S SOVEREIGN
DEBT RESTRUCTURING
• in December 2001 Argentina collapsed and ceased all debt payments
• Argentina’s total public debt grew from 63% of GDP in late 2001 to 150% of GDP in early 2002
• Resolving includes:
• adopting policy changes
• obtaining official emergency financial assistance from IMF
• undertaking debt restructuring
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ARGENTINA’S SOVEREIGN DEBT
• For most of the 1990’s Argentina was seen as a model of successful policy making by pegging its exchange rate to the dollar under a currency board type arrangement in 1991
• Argentina ended hyper-inflation
• Reducing inflation rate to single-digit level
• The banking sector was strengthened considerably, in the part because of an increase in foreign bank entry
• A 1998 World Bank financial sector review rated Argentina second only to Singapore among emerging markets in the quality of its bank supervision
• Greater economic stability attracted foreign investment inflows, contributing to an acceleration in economic growth
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RECOVERING DEFAULTED SOVEREIGN
DEBT
• 1- Adjusting Policies
• * correcting fiscal and current account deficits and
structural imbalances involve banking sector, utility
regulation and federal-provincial fiscal relation
• * return of robust growth, increased tax and decrease
expenditure
• 2- emergency IMF financing
• 3- restructuring debt to achieve long-term financial
sustainability
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ARGENTINA’S RELATIONSHIP WITH
THE IMF
• Argentina had good relationship with IMF with strong support of the USA
• IMF lending typically is done with a clear understanding that such challenging reforms will be accomplished
• IMF can not dictate policy
• IMF can exert leverage by having the option not to lend
• IMF can make role in restructuring debt indirectly by continuing lend to a country in default
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ARGENTINA’S RELATIONSHIP WITH
THE IMF
• IMF policy allows fund lending in circumstances in
which:
• (i) Prompt fund support is considered essential for the
implementation of the member’s adjustment program
• (ii) the member is pursuing appropriate policies and is
making a good faith effort to reach a collaborative
agreement with its creditors
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RECOVERING DEFAULTED
SOVEREIGN DEBT
• While Argentina wouldn’t able to pay its debt in full,
what amount and condition would satisfy both sides?
• Countries in default reach a voluntary agreement with
creditors or by litigation
• recovery rate have varied and Latin America
restructurings ranged from 0%-45% reduction in the
nominal value of debt
• Overall debt burden must be consistent with the
country’s capacity to make payements
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ARGENTINA’S DEBT RESTRUCTURING
STRATEGY
• only 53% of Argentina’s debt was carrying burden of
restructuring so the write-down had to be huge
• creditors argument: Argentina was not absolved of its
responsibility to negotiate
• Having 152 bonds denominated in 7 currencies and
governed by 8 legal jurisdictions
•
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ARGENTINA’S DEBT RESTRUCTURING
STRATEGY
• Argentina first of all put off private bondholders
while negotiating with the IMF until March 2003
• not all debts would be treated equally
• Negotiation with creditors remained stalled and
Argentina entered into a new controversial 3 years
$12.6 billion with IMF
• soft agreement: Argentina’s proposal was to commit
only a 3% of primary fiscal surplus (Brazil was 4.25%)
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THE DUBAI PROPOSAL
(SEPTEMBER 22, 2003)
• interpretation: paying 25 cents on the dollar of
principal value of the debt with no recognition of PDI
• 90% reduction in the value of bond (NPV)
• IMF suggestion: Argentina could master a higher
primary surplus and make good portion of its debts
• Dubai proposal resisted by creditors groups
• IMF delayed the first quarter review program
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THE DUBAI PROPOSAL
(SEPTEMBER 22, 2003)
• Argentina continue to meet its macroeconomics targets
• IMF pressured Argentina over its lack of good faith
effort in debt restructuring negotiations and failure on
microeconomics reforms:
• utility pricing
• banking regulation
• restructuring in provincial-federal arrangements
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THE DUBAI PROPOSAL
(SEPTEMBER 22, 2003)
• IMF required that Argentina negotiation be acceptable
to at least 80% of bondholders by September 2004
• Argentina wield its own leverage against lenders
• IMF with $15 billion investment in Argentina had its
own interest in keeping Argentina from falling into
arrears
• Final Result: Argentina accepted to negotiate formally
with all creditors but it did not change its fundamental
offer
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THE FINAL BUENOS AIRES OFFER
• Negotiations began in April 2004
• Bondholders again contested the process and
Argentina cancelled further talks and tabled its final
offer on June 1
• Bondholders rejected the unilateral offer because
Argentina failed its IMF commitment to make a good
faith effort to reach a collaborative agreement
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THE FINAL BUENOS AIRES OFFER
• Argentina differed its offer: recognized PDI through
the end of June 2004 so at least 70% of bondholders
agreed
• the debt wright off would still 75% of outstanding
debt but on a present value not nominal.
• Argentina anticipated issuing $43.2 dollars in new
bonds with minimum 70% participation rate.
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THE FINAL BUENOS AIRES OFFER
• Argentina anticipated issuing $43.2 dollars in new
bonds with minimum 70% participation rate.
• 1- Discount Bond ($19.9 billion): 30 years bond with a
63% reduction in principal value
• 2- Par Bonds: 35 years bond at face value
• 3- Quasi Par Bonds: 42 years bond with undefined
reduction in principal
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IMF PROGRAM SUSPENSION
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• Argentina announced it would suspend its IMF
agreement
• for the short term Argentina needed time and freedom
for IMF conditionality to finish negotiations with
creditors more than it needed IMF financing
CHRONOLOGY OF EVENTS
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• 1980’s: economic instability including Latin American
debt crisis and hyper inflation
• 1989: A major structural adjustment program: tax
reform, privatization, trade liberalization,
deregulation, adoption of a currency board
• 1991: Congress enacts the convertibility law of peso to
dollars at a 1-1 fixed rate
CHRONOLOGY OF EVENTS
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• 1991-1994: strong economic growth and successful
currency board
• 1995: Mexico’s peso devaluation and capital outflow of
emerging markets and GDP declined by 2.8%
• 1995-1999: real appreciation of US dollar and so Peso
• 1996-1997: Renewed period of Argentina’s economic
growth, but account deficits and debt measure worsen
• July 1997: East Asian financial crisis
CHRONOLOGY OF EVENTS
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• 1998: Financial crisis moves to Russia and then Brazil
and Argentina enters a recession and unemployment began
to rise
• 1999(Jan): Brazil devaluated its currency, hurting
Argentina’s exports, 30% of which were with Brazil
• 1999(Sep): Congress committed government to large
reduction in federal and provincial spending
• 1999(Dec): New President seeked assistance from IMF
CHRONOLOGY OF EVENTS
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• 2000(Mar): IMF agreed to 3 years $7.2 billion with
Argentina conditioned on a fiscal adjustment and
assumption of 3.5% GDP growth in 2000 (0.5% in actual)
• 2000(May): $1 billion budget cut to bring renewed
confidence in economy
• 2000(Sep): IMF conclude an Article for required annual
review of member country economics
• 2000 (Oct): President decision not to replace two cabinet
member linked to a Senate bribery scandal
CHRONOLOGY OF EVENTS
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• 2000(Dec): Government announced a $40 billion
assistance package by IMF
• 2001(Jan): poor performance prompt IMF to augment the
agreement by $7 billion and assuming 2.5% GDP growth
(-0.5% in actual)
• 2001(Mar): replacing the minister of Economy
• 2001 (Jun): $29.5 billion voluntary debt restructuring and
short-term debt exchanged for longer maturity and higher
interest rate
CHRONOLOGY OF EVENTS
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• 2001(Jun): allowing a 7% devaluation in hope to
improving Argentina’s international competitiveness
• 2001(Jul) A balanced budget planned but the market
reacted negatively
• Unions call a nationwide strike to protest austerity plan
• Congress passes Zero Deficit Law
2001(Sep): IMF increased lending commitment by $7.2
billion
CHRONOLOGY OF EVENTS
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• 2001(Oct): provincial bonds used to pay as public
salaries
• opposition party wins congress elections
• 2001(Nov): Argentina exchanged $60 billion of bonds
with an average interest rate of 11-12% for extended
maturity bonds with 7% interest rate
• Run on the banks, president impose $1000 per month
limitation on personal bank withdrawals
CHRONOLOGY OF EVENTS
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• 2001 (Dec): protests begin over withdrawal limitations
• IMF withhold $1.24 billion loan installment
• Argentina announced it can no longer guarantee payment on foreign payment
• unemployment reached near record 18% and unions called nationwide strike
• supermarket looting begins
• rioting spreads to major cities and Minister of Economy resigned
CHRONOLOGY OF EVENTS
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• President resigns leaving 28 people dead
• liquidity standards for banks are relaxed and new economic plan: 1) suspension of payments on public debt
2) New jobs creation program 3) creation of a new currency to begin circulated in Jan 2002 and not to be convertible to the U.S dollar
* new president resigned
CHRONOLOGY OF EVENTS
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• 2002(Jan): Duhalde new president blamed Argentina’s
problems on the free market system and vows to change
economic course
• devalue peso by 29%, converting all debts up to $100,000
to pesos, controlling capital and bank account, new tax on
oil to compensate creditors losses, renegotiating public
debt, and a balanced budget
• bank holidays extended two extra days, the currency
market opened and peso falls immidiately to 1.7 per dollar
THANKS
FOR
YOUR
KIND
ATTENTION
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