ARGENTINA: Renewing Debt Payments to Be Hard, Even with Write-Off

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Feb 25 2003 (IPS) - The Argentine government wants sharp reductions in the debt held with private foreign creditors, who it stopped paying 14 months ago. But even if the debt burden is eased, it will still be extremely heavy for a country where the only sustained growth in the past few years was in the poverty rate.

Argentina’s public debt stood at 144 billion dollars in December 2001, when the economic crisis exploded and the government defaulted on payments to some 700,000 private debt title holders in the United States, Europe and Japan, to whom this South American nation owed a total of some 60 billion dollars.

The rest of the foreign debt was estimated at 175 billion dollars in June, owed to multilateral credit organisations like the World Bank and International fund, and to foreign governments. Argentina continued to make debt payments to these debt holders through 2002.

The nation also made payments to private Argentine investors, but in pesos, despite the dramatic devaluation of the currency with respect to the dollar, leading many to take legal action.

This month, in the new context of stable economic variables after several years of crisis, the Eduardo Duhalde administration took the first step towards renegotiating with the private creditors: it named the French investment bank Lazard Freres as its financial adviser on the matter.

Lazard Freres will charge Argentina 190,000 dollars a month to engage in dialogue with the private creditors, who are spread around the globe and hold more than 130 types of Argentine bonds with different maturities and different interest rates. The entire process is expected to take at least a year.

Restructuring Argentina’s debt will be complicated, even in comparison to the experiences of other countries that faced similar processes in the wake of defaulting on payments to private bondholders.

It took Russia six months to renegotiate debt worth some 30 billion dollars, related to just three types of bonds.

Ecuador was more than a year in renegotiating just 6.5 billion dollars held in six types of bonds.

Guillermo Nielsen, Argentina’s secretary of finance, began a European tour this month to sound out the attitude of the creditors.

"One of the issues to negotiate is the debt write-off that Argentina will propose," with assessment from Lazard Freres, said Nielsen in Berlin.

Officials at the Economy Ministry have been working with the idea of a 70-percent release from debt because the Argentine debt titles are currently trading at 30 percent of their nominal value. Argentina would pay the relatively low sum of around 18 billion dollars.

Even with that write-off, however, financial experts consider the social weight of the debt would still be too much for an economy that has endured four long years of recession, a period that has seen the portion of the population living in poverty rise from 33 percent to 55 percent.

But officials and experts agree that it will be a difficult task to convince private to accept a cut in the value of the bonds they hold.

The debt release the government is seeking would be legitimate, says Claudio Lozano, economist for the CTA trade union federation, "because the gap between gross domestic product (GDP) and the debt in dollars is brutal."

The Argentine peso depreciated 68 percent in 2002 "and there is no possibility of paying off the debt," Lozano told IPS.

The official forecast for this year’s GDP is 110 billion dollars, or a recovery of 3.5 percent after falling 11 percent in 2002, the most acute period of the Argentine crisis.

"The debt is enormous in relation to the GDP… because the creditors loaned poorly. They should take responsibility for their mistake and take the write-off," said the labour union economist.

The payment of the debt that Argentina wants to renegotiate would require a fiscal adjustment "that would fall mostly on public spending, and particularly in the provinces in the areas of health and education, and social policies in general," Lozano said.

Economist Julio Gambina, of ATTAC (Association for the Taxation of Financial Transactions for the Aid of Citizens), told IPS he is of a similar mind. ATTAC is an international organisation aimed at creating a global tax on international movements of speculative capital, with revenues to be earmarked for social development.

Gambina commented that the debt title holders abroad made a very risky investment in a country in crisis, with the intention of "improbably" collecting on the very high interest rates offered, nearly four times the market average.

It is very likely that the Argentine government will try to swap those bonds, with different maturities and high interest rates, for others under conditions less advantageous for the holders, but in the end "the renegotiation is a payment plan, and that means earmarking funds from the public budget to compensate the creditors," said the economist-activist.

Following an eventual write-off, the debt would be less, but to meet payments would require cutting state expenses, "like health, education and unemployment subsidies," explained Gambina.

"For the common citizen, it is never good to take on these debts that in the long run always grow more burdensome."

"The debt is unpayable, and the creditors who took the titles at 15.5 percent – when the international rate did not surpass four percent – knew perfectly well that they were making a risky investment. As such, they have to assume the risk of not being paid," he said.

The notion that Argentina might not recognise those debts has some bondholders, who are not always among the financially powerful, very nervous.

In recent years, pensioners, workers and other savers from the middle class acquired various debt titles issued by emerging or developing economies, with the idea of winning a profit.

Tens of thousands of people who made those purchases, whether under poor advice from banks or aware of the risk they were taking, today are unsure if they should accept a write-off in order to minimise their losses or take the case to court, as some creditors in Italy and the United States are already doing.

Either way, the outcome will be grave for a great many already- distressed Argentines, who face the perspective of even further spending cuts, delaying the conditions necessary for creating economic growth and social well being.