On March 3, the government of Argentina announced that it will renegotiate its foreign debt securities with 76.07% of its creditors. But the conditions for renegotiation were not ideal for creditors. The government promised to offer them only 25 cents on each dollar of their holdings in debt securities. Nevertheless, many believe this was the only way for Argentina to emerge from the financial hell it entered in 2002.
Some analysts view this process as a victory for the current government. However, others express skepticism about the advantages Argentina might derive. Only time will tell who is right. In the meantime, could the debtor nations of Latin America, such as Brazil, find inspiration in the Argentine example, and move toward a possible renegotiation of their own debts?
At the very least, the government of Argentina appears to have chosen the right moment for renegotiating now that Latin America has regained center stage in the mainstream global media. As the Financial Times of Britain, the “liberal bible” of the global economy, recently noted, “Latin America is once again in style” in the business world.
There is also a clear trend toward stability in the region, where the average growth rate was 5% last year. Might the nations of Latin America take advantage of this situation to improve their economic conditions, and even reduce their swollen volume of debt?
According to José Alves Donizeth of the Institute of Political Science of the University of Brasilia, “The Argentine case has opened a very new and disturbing precedent in the world economy. The key question is, what is going to happen in Argentina from here on,” asks Donizeth. “Will things get back to normal after the renegotiation of the debt, the default, and the moratorium? Or are we facing a precedent that is completely unheard of in the world economy?
“Everything seems to suggest that after Argentina’s foreign debt securities are renegotiated, the government is going to move ahead energetically to issue new bonds. Argentina has repaired its economic disaster and it is beginning a new stage. Apparently, the market is quite disposed to invest in Argentine bonds. If this really happens, we will be facing a very innovative precedent in international economic relations.”
Donizeth believes that this could stimulate other countries to try to renegotiate their debt on more attractive terms. The way the global economy is restructured “makes us think that the most important thing is the free circulation of markets,” he says. “People are more uncomfortable about the fact that Argentina is outside the markets because of the moratorium than they are uneasy about the moratorium itself. It was quite an accomplishment to negotiate, even in extremely unfavorable conditions for creditors. Now they can reopen the market to the free circulation of bonds, apparently in order to restore normalcy.”
The Financial Times called the renegotiation of Argentina’s external debt holdings a “dangerous precedent” because the experiment could stimulate countries on the verge of default to feel more confident about adopting this strategy. There is reason to believe that analysis. A week after announcing the results of its debt negotiation, trading volume for new bonds issued by the Argentine government rose 15% on the Buenos Aires futures market.
Not everyone agrees with Donizeth. João Luiz Mascolo, professor of macroeconomics at the IBMEC-SP (a leading Brazilian business school located in Sao Paulo), believes no other country in Latin America, including Brazil, needs to make similar moves. “Brazil has a debt of more or less 50% of its GDP. It is making a fiscal effort; I won’t say that it is a sufficient effort but it is a reasonable effort. So I don’t see why Brazil would put itself in a similar situation as Argentina,” says Mascolo, adding that “I see no great advantage in what Argentina has done. When will investors return? What’s worse, President Néstor Kirchner maintains a belligerent attitude toward multinational companies.
“In my view, this is a bit suicidal. First, go into default and lose the confidence of the world. Yet, still maintain a residual debt that is very high — 80% of GDP (the percentage that remained as debt after the renegotiation of 2005). This is going to require the Argentines to make a very great fiscal effort. In my view, no other country needs to take the same approach.”
The government of Brazil is also taking a very cautious view of the Argentine situation. According to Ricardo Moura, general manager of foreign debt for Brazil’s national treasury, “The analysis about whether Argentina’s renegotiation has been positive has been quite hasty. The country has obtained quite a high discount really; a prolongation of the repayment period. All this has come at the cost of not having access to international capital markets and a sharp drop in its GDP. Social conditions in the country have also seriously deteriorated. Many people have been below the poverty line since the end of 2001, when Argentina enacted its moratorium.
“You hear a lot of people say, ‘Ah, but Argentina has grown a lot over the last two years,’” notes Moura. “That’s true, but it has grown after suffering a large decline in its GDP. When you do that, it is a lot easier to grow again. And Argentina has paid a very high social price in terms of employment, as well as growth in the number of people below the poverty threshold during the moratorium.”
On the other hand, Moura adds, Argentina managed to achieve this financial maneuver with relative success. “I say, ‘relative’ because 76% does not mean that it was a disaster. Nor was it a success, when you take into account the historic examples of debt renegotiations that were around 95%.” In his view, Argentina achieved a relative success because the renegotiation took place between the end of last year and the beginning of this year, when the market had a lot of liquidity and conditions were quite favorable. “It was a success in terms of change, but we won’t know the true cost of the renegotiation for many years.”
For its part, could Brazil benefit from a [similar] renegotiation without having to declare a moratorium on its debt? Could Brazil at least issue new bonds that mature over a longer term, or pay lower interest rates? “Brazil could at least propose an improvement in its payment conditions,” says Donizeth, “especially if the country risk of Argentina matches that of Brazil. Brazilians could legitimately demand a reduction in the primary surplus in public accounts — a measure adopted under the guidance of the International Monetary Fund to guarantee the savings in funds required for paying the debt. Instead of reserving 4.5% of their GDP as a guaranteed fund, the way we are doing now, they could reduce it to 3.5%. That way, there would be enough money left over for investing in the social sector. That is the main issue because Argentina’s country risk is currently being exaggerated. But with the elimination of this weakness in the economy, and the issuing of new bonds by the government, Argentina’s country risk could fall, and come close to that of Brazil. Currently Brazil is at about 400 points, and Argentina is at about 500 points. If that happens, it will prove that the Argentine moratorium was an excellent deal for the country, and it will create a new legal precedent when negotiations take place in the future.”
According to Mascolo, however, the current situation is not as simple as it looks. Ultimately, despite appearances, the market does not have much confidence in the governments of Latin America, including Brazil. “Brazil does not inspire extraordinary confidence. Just a few years ago, we were in a pre-moratorium situation. We have a chronic problem, fiscal adjustments. It does not help to say: ‘Ah, the primary deficit is 4.5%! That is not enough to bring our debt/GDP Relationship down from 50% to 30% within a reasonable time, which would allow us to prolong repayment of the debt. Here is what happened: The primary surplus has been maintained at the cost of high spending and high taxes. This is not providing very favorable signals. Renegotiating to prolong the repayment period might make sense if that shows the world that we are making an enormous effort. It seems to me, in such a case, no one would refuse to enter a joint process. However, I think there is a lot of marketing involved in this supposed Brazilian fiscal effort, and they have to do more than they are. What’s really missing is a greater willingness to cut spending.”
Another factor can provide a disincentive for Brazil to follow the Argentine example. According to Moura, Argentina’s renegotiation process was quite awkward because it was a forced restructuring. Creditors were obliged to swallow the deal. The 24% of creditors who were not involved in the renegotiation process kept their holdings of bonds that Argentina says it is not going to pay off. Their only remedy will be to go to the courts to get what they believe they deserve. This is called “debt repudiation.” “You say, ‘I am not going to pay; I do not recognize that debt.’ This is an extremely awkward situation. It is something that has happened only a very few times in history — for example, during the Communist Revolution in China and with Cuba in 1959. It happens when there is a radical change in the government, and the new government comes in and says, ‘I repudiate that debt; I do not recognize that debt.’ That is what Argentina is doing informally when it says, ‘If you don’t exchange the [loan] documents, you won’t get any money!’”
Only time will tell if the Argentine initiative winds up helping the country’s economic prospects, or if the country’s already hard-hit population winds up paying a price for the moratorium, which culminated in this renegotiation. “Did it help Argentina or didn’t it?” Moura wonders. “Many people are rushing to judgment, saying that it was good for Argentina. We will only know the true cost after we see how Argentina manages to get back into international capital markets. Will Argentina once again be able to attract money, so it can make the investments it needs? Will there be new investments in its infrastructure and manufacturing sector? Will there be credit lines for exports and imports? We will have to wait one, two, three or even five years to find out.”