--- Michael Pollak <mpollak at panix.com> wrote: >
> [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.]
>
If I understand the proposal correctly, it isn't a 30% default. The idea is this:
In a crisis, one of the main problems is the "rush for the exits". The idea is that in a restructuring, everyone wants to sell and nobody wants to buy. So, even if you think that Argentina will pay 99 cents in the dollar, you sell the debt, in the hope of buying it back later at a cheaper price. But since everyone is trying to do this at the same time, the price craters down to 50 cents in the dollar. And no bank is going to lend new money at a rate of less than 50% when that's available in the market. So there's just a hellish situation that nobody knows how to manage. Meanwhile, the community of bondholders is churning rapidly, making it difficult to negotiate anything. And the kind of people who pick up bonds in a fire sale are often a little bit ... difficult, frankly.
Meltzler's idea is that at the announcement of the default, the IMF announces that it will buy Argentinian bonds at 60 cents in the dollar. This removes the incentive to panic, because you now know the maximum extent of your loss. Anyone who wants to sell, sells to the IMF at 60c. That won't attract genuine vultures, so there's more of a chance of an orderly market. In fact, given a guarantee that there will be liquidity and that they won't get "stuck" with a position, it's likely that the everyday traders will continue to make a market and the price will never even reach 60.
Think of it in terms of the bond market as being a "convenience for rentiers". We use this term pejoratively, but it is a genuine convenience. An illiquid position is, in some circumstances, as good as worthless; if rentiers don't have the convenience of a liquid market, a lot of them will refuse to rent. What Meltzler is suggesting is that the IMF steps in to do the market's job for it in crunch circumstances. And I think that this is the answer to the question about paymasters -- a cash holding of 90 cents is often a lot better than a paper one of 100
The level of 60 has most likely been set because that's a level at which the IMF could practically guarantee that it would make a profit on its brief venture into bond trading. Even the super-bears of Argentina (of which I am not one) are pretty sure it can pay 80-90 cents in the dollar.
dd
===== ... in countries which do not enjoy Mediterranean sunshine idleness is more difficult, and a great public propaganda will be required to inaugurate it. -- Bertrand Russell
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