[I feel like I'm missing something important. It seems that what Meltzer & Co. mean by "restructuring" is a controlled default of 30%. And it seems at first glance that this might be great for debtor countries that went through it, if DD's idea about short memories holds true -- a nice, clean, swift, bankruptcy. But could Meltzer possibly be so serious about removing moral hazard that he wants investors to take a major hit to the benefit of poor countries that don't vote? And his paymasters would let him? It seems too good to be true. So I await enlightenment.]
Financial Times, May 17, 2001
Argentina faces up to quandary over its creditors: A growing list of economists say that the country should bow to the inevitable and restructure its debt
Reporting by Thomas Catan in New York, Stephen Fidler in Washington and Peter Hudson in Buenos Aires
As Argentina prepares a huge bond exchange to ward off a feared debt default, a growing number of academic economists are urging it to concede the inevitable and restructure its debt.
<snip>
But even as the economic team works around the clock to prepare the complex transaction, a growing number of economists are saying that the operation will do nothing to solve Argentina's problems - and could make things a good deal worse.
According to these mostly academic economists, Argentina is not facing a temporary liquidity problem that can be solved with international assistance, but a deep-seated solvency problem. The swap, they say, is merely an expensive way to delay the inevitable.
"There is no longer any realistic hope that Argentina can continue to service its debt," argues Michael Adler, an economist at Columbia University, in a paper circulating among investment bankers. "This proposal is likely to be worse than useless."
Mr Adler's argument - that Argentina must immediately restructure its debt burden and that the consequences need not be disastrous - closely echoed an earlier paper by Charles Calomiris, a colleague at Columbia University with connections to George W. Bush's economic team.
At the same time, two prominent IMF critics have come up with a plan for dealing with sovereign debt crises that would have sweeping implications for Argentina. Allan Meltzer and Adam Lerrick, both former members of a commission that sharply criticised the IMF's actions during the Asian crisis, have submitted the plan to US lawmakers for discussion.
In the case of Argentina, which has nearly Dollars 90bn of government debt outstanding to the private sector, when collateral is excluded, the IMF could offer to set a price floor for a bond exchange. This would prevent a downward spiral of Argentine bond prices with contagion effects in other countries.
Under this proposal, outlined in the FT last week, the fund could offer to pay investors, say, 60 per cent of the face value for the bonds. Meanwhile, a bond exchange estimated to be worth say 70 per cent of face value - low enough to cut Argentine debt to sustainable levels - would be offered to investors.
Nevertheless, Domingo Cavallo, Argentina's economy minister, has repeatedly ruled out any transaction that would not preserve the value of the debt, saying that a default would have disastrous consequences. Many investors agree. They point out that Argentina's debt makes up nearly a quarter of tradeable emerging market bonds, and that any default could set off a round of contagion around the world.
"Saying that the markets won't be affected is naive at best," says Richard Madigan, who manages emerging market assets for Offitbank in New York.
With their banks earning high fees for participating in the debt swap, many Wall Street economists have gone silent in recent weeks. But economists at some smaller banks are starting to say publicly that the transaction amounts to shuffling deck chairs on the Titanic.
"It is time to force a final resolution to Argentina," wrote Walter Molano, economist at BCP Securities in the US, in a recent note to clients. "Regardless of what sleight of hand Cavallo tries, the Argentine economy will not grow due to its prodigious debt load and overwhelming fiscal burden. It is time to pull the plug (or) we may find ourselves in a crisis of larger proportions."
Copyright: The Financial Times Limited