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Tuesday, January 13, 2004

Latin America's Greatest Game

It's not soccer, it's debt negotiations. And Argentina is playing the mother of all matches.

The situation, as it stands, is simple: Argentina owes above a hundred billion dollars to foreign private creditors, and it's offering to pay about 25% of it. Creditors refuse the offer, and there are we, in a stand-off of sorts. But a number of factors complicate this simple picture.

Given his nigh-hegemonic political power, the Argentine position is actually President Kirchner's. Lacking (at least so far) a peronal power structure, he needs internal support and cash (to pay for the social programs) in the short term, and a growing economy in the middle term. Thus, it makes sense for him to keep the IMF/World Bank obligations and offer a very small sum to private creditors: it maximizes surplus resources and internal support (the debt is a very politically charged issue in Argentina) while keeping open the doors for future loans that will finance Argentina's growth beyond the next year. Don't let the rhetoric fool you: it's a rational position, as far as it goes.

Creditors, of course, want as much of their money as they can get. Their actions are based on how much they expect the Argentine government will ultimately be willing or forced to pay. So far, they seem to think that it's going to be around 65% of the debt, although probably via (unprecedented in scope?) judicial procedures that the Argentine government is trying to pre-empt by denying the representative nature of currently engaging groups.

The critical questions shaping the future of the Argentine debt issue are then:

Q1: Could/Will judicial actions asssure payment above the
government's offer? If so, creditors are going to get what
they want, and Kirchner's is going to be in deep political

Q2: Could/Will the Argentine offer be used as a precedent
in other cases? If so, and judicial measures fail, creditors
are never going to accept the 25% offer, as it would
drastically slash the value of the global emergent debt

Q3: Can Kirchner's internally-generated support and
surplus outlast the Argentine bonds and the country's
need for investment? If they begin to depreciate quickly
enough, judicial actions seem ineffective and the offer is
not seen as a too-dangerous precedent, then investors are
going to take the goverment's offer, cutting their losses so
to speak. On the other hand, if the country begins needing
external cash to keep up with demand -for example, if soy
prices drop too much, then external financing will be
unavoidable, and creditors will force better terms.

The answers to these questions will determine, I think, the resolution of this issue, perhaps one of the most critical conflicts going on in the financial world today.

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