Washington Post's Paul Blustein: Many View Argentina's Comeback With Skepticism

Many View Argentina's Comeback With Skepticism

Some Financiers and Bondholders Say Offer to Settle Huge Debt Is Far Too Little
By Paul Blustein
Washington Post Staff Writer

Friday, March 4, 2005

BUENOS AIRES -- Tainted for the past three years as a deadbeat debtor and international financial pariah, Argentina is proclaiming itself cleansed.

In late 2001, during bloody riots, the Argentine government defaulted on about $100 billion in debt. The default was the biggest by any nation in history, and it plunged the economy into chaos, with millions falling into poverty and unemployment reaching nearly one-quarter of the workforce. Many Argentines are still struggling to recover from the fallout.

Now, however, Argentine is recovering, and it is seeking to reenter the global financial system after having cast itself out. The implications go well beyond Argentina's borders to the international system's basic workings.

The government is completing a restructuring of its debt in which it offered new securities to hundreds of thousands of bondholders, ranging from Italian widows to New York hedge funds. Officials announced yesterday that bondholders owning 76 percent of the defaulted debt had accepted the deal, worth about 32 cents on each dollar of claims that they held.

"The country is leaving the default behind," a triumphant President Nestor Kirchner told the nation's Congress.

That assertion is subject to challenge by international financiers and investors. Many of them are angry with the take-it-or-leave-it terms of this week's deal, which leaves bondholders with losses about twice as deep as the average settlement reached in previous sovereign defaults such as Russia's and Ecuador's.

Thrown into question in the process are some hoary financial principles. Countries that treat foreign creditors so shabbily are supposed to be doomed to stagnation for years, because investors and lenders presumably will shun nations that show little respect for property rights. But the boom that Argentina is enjoying stands in mocking counterpoint to that tenet.

It is not just that Argentina recorded annual growth of 8.8 percent for the past two years. More significant, companies are investing. According to government figures, business spending on structures, plant and equipment is close to all-time highs as a percentage of national output.

The investors include foreign-based multinational companies such as Volkswagen. Eight months ago, the German automaker decided to spend $200 million on producing a new vehicle model and expanding capacity at its transmission plant in the industrial city of Cordoba.

"You can see just by opening the paper" that foreign firms are expanding in Argentina, said Viktor Klima, the head of Volkswagen's operations here, referring to a news article reporting that General Motors was investing in its plant in the city of Rosario, and another reporting that a company was moving its manufacture of ignitions to Argentina from South Africa.

Other investors are Argentine. Aluar Aluminio Argentino SAIC, a major aluminum producer, is sinking $650 million in a two-year project to increase its capacity by about 44 percent to 400,000 tons a year. Eduardo Elsztain, the country's biggest real estate developer, has just opened a shopping center in Rosario. He has more malls in the works elsewhere in the country and his firm is planning to start construction soon on a $42 million retail-residential-hotel complex bordering a nature preserve near the capital's downtown area. In Elsztain's view, "there has never been a better time to invest in Argentina." As for foreign banks, after shunning Argentina for a while, "now the banks are coming to us," he said.

"It's been tough. We will have restrictions," he said. "But in terms of access to capital, what defines access? Greed. When opportunities look profitable, access to capital will be easy."

During the 1990s, Argentina had no worries about obtaining international capital -- and that was how it went astray. With its free-market policies, a fixed exchange rate of $1 per peso and a near-zero inflation rate, the country was the darling of the International Monetary Fund and a magnet for foreign funds. It depended on international bond markets to cover its budget deficits, and Wall Street was happy to oblige. Once foreign financiers realized the country had piled up unsustainable debts, however, they began to pull their money out. The ensuing default also led to a crash of the peso.

Today the government has no need to borrow from abroad because it has been running budget surpluses. That is attributable in part to soaring prices for soybeans, wheat and other commodities, which have fattened the country's export receipts and tax revenue. It is also partly attributable to the government's discipline in keeping a lid on the wages of public-sector employees. With the government treasury full, economic policymakers here can shrug off the threats by foreign money managers to boycott Argentine bonds.

The rules of global finance have by no means been repealed entirely. Argentina is still paying a steep price for its default. More than 40 percent of the population remains below the poverty line, and obtaining long-term credit remains very difficult, if not impossible, for many companies.

Still, many in the financial community are upset over the ease with which Argentina is breaking loose from the constraints that usually hobble bankrupt countries. The research firm CreditSights Ltd. wrote in a recent report to its investor clients: "Debt repudiation with no consequences . . . appears to be the perfect crime that Argentina is about to perpetrate with its debt exchange."

Objections Abroad

During a tour of foreign cities a few weeks ago to explain the offer, Finance Secretary Guillermo Nielsen was greeted by protests by investors. "Thievery," "coercion" and "extortion" are among the epithets that investors have used to describe the 32 cents-on-the-dollar value of the exchange.

In response, Argentine officials said that the deal was the most the country could reasonably afford, and those who rejected it faced the prospect of collecting nothing.

The Argentine stance has triggered a number of lawsuits from bondholders, some of whom have won judgments -- in U.S. courts, among others -- requiring Argentina to pay its obligations in full. But collecting such judgments has so far been impossible. The assets that the Argentine government holds abroad -- embassies, mostly -- are protected from legal attachment under international conventions.

That helps explain why such a high percentage of creditors, worn down after receiving no payment on their bonds for three years, participated in the exchange despite their disgust with the terms. By reducing the outstanding number of bonds in default, the government has cleared the way for a new loan agreement with the IMF, an important consideration because a serious confrontation with the IMF would cost the country billions of dollars in international aid and throw it back into the pariah camp.

All this could have significant ramifications for the international system, by making future crises more likely, some policymakers and economists fear. Because the Argentine restructuring is likely to set a new benchmark for investor losses on loans to governments in Latin America, Asia and other "emerging markets," the deal may make markets more prone to bolt from those areas when the global financial environment turns sour.

Some on Wall Street see an even more dangerous precedent: Won't countries with large debt loads such as Brazil, Turkey or the Philippines look at the Argentine case and wonder whether they should default too? Walter Molano, head of research at BCP Securities LLC in Connecticut, wrote in a Feb. 22 note to clients that, thanks to Argentina's example, "finance ministers across the emerging markets are having second thoughts about making fiscal sacrifices in order to continue servicing their external obligations."

Maybe so, but the idea that Argentina provides a model to follow is hard to square with some of the country's gritty realities.

Street Scavengers

The competition is fierce among the unemployed Argentines who descend on this city's streets at night, sifting through trash bags for recyclable items and castoff appliances.

"Are you working this block?" a woman with a young girl in tow asked a short middle-age man who was squashing a plastic bottle for sale to recyclers. Told that he and his children scavenge in the area every evening, the woman and the girl moved on forlornly in search of unclaimed garbage.

The ranks of these cartoneros (cardboard men) swelled into the tens of thousands after the default. To be sure, most Argentines have not been forced to join them. But the cartoneros' plight is emblematic of the fate that befell the country.

The rebound of the past couple of years has failed to improve the lot of ordinary Argentines to the point that they have recovered all of what they lost. Even for salaried workers who kept their jobs, real earnings -- that is, adjusted for inflation -- are still well below the 2001 level. Compared with the peak level of 1998, real wages are down 20 percent, according to data compiled by IDESA, a private think tank.

The problem stems in large part from the depreciation of the peso. With the Argentine currency now trading at about three to the dollar, instead of the one-for-one exchange rate that prevailed before, many goods tied to the dollar -- real estate, cars, electrical appliances -- are out of reach for many Argentines.

On the plus side, the cheap peso is one of the major factors attracting foreign manufacturers such as Volkswagen, which pays its workers an average of less than $6 an hour, including all fringe benefits -- just about the lowest wage in Volkswagen's operations worldwide, according to Klima.

But the diminution in living standards is all too perceptible to Antonio Delgado, who has worked as a nurse in public hospitals for 20 years and supplements his modest salary by working weekends at a private clinic, earning about 2,600 pesos ($870) a month.

The father of five, Delgado remembers the roaring 1990s fondly. He and his family could afford to feast regularly on the tenderest cuts of steak. He bought a 1992 Peugeot and a 1995, two-door Fiat, and the family flew on vacations to places like Central America. Now meat in the family diet tends to be restricted to stews, the Peugeot is rented to a neighbor for use as a taxi, and for vacations the family bundles into the little Fiat for drives to places in the north and west of Argentina. "I really felt the shock of 2001," Delgado said ruefully.

Generation Disillusioned

The trauma is psychological as well, particularly for Argentines who were entering adulthood when the economy collapsed and have become profoundly unsettled about their futures. Dario Jinchuk, a government scientist, cited the example of his son, who stopped pursuing a degree in electrical engineering to study for a job as a chef because he couldn't see any engineering prospects. "A whole generation has become that way -- frustrated," said Jinchuk, who himself is seeking work abroad.

In view of such evidence, many economists scoff at claims that Argentina's default sets a worrisome precedent.

The country suffered "massive social and economic pain with poverty and unemployment rates through the roof," said Nouriel Roubini, a professor at New York University. "And all this would mean that default is costless and that other countries will rush to default like Argentina did? Utter nonsense."

To generate the growth required to reduce poverty significantly, Argentina needs a lot of investment. For that reason, some of the most militant bondholders maintain that the government must eventually offer them a better deal to clear up the uncertainty that lawsuits inevitably create.

But in a move aimed at dashing such hopes, the Argentine Congress enacted a law last month prohibiting the government from paying a penny more. "We were very happy for this law to be passed," said Roberto Lavagna, the economy minister, who clearly sees little downside to such pugnacity.

"When I hear people say, 'Argentina will be isolated,' " Lavagna said, "I have to say the evidence is different."

Special correspondents Brian Byrnes and Mariano Melamed contributed to this report.
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Prudent Investor Comments

With Argentina succesfully dodging a comeuppance from the international financial community for its humungous debt default, the possibilty is that the Argentine model could be a precedent for any debt-laden emerging countries to go on a default. A case of Moral hazard?