Argentine debt restructuring
Encyclopedia
Argentina
went through an economic crisis
beginning in the mid-1990s, with full recession
between 1999 and 2002; though it is debatable whether this crisis has ended, the situation has been more stable, and improving, since 2003.
Argentina default
ed on part of its external debt
at the beginning of 2002. Foreign investment fled the country
, and capital flow towards Argentina ceased almost completely. The currency exchange rate (formerly a fixed 1-to-1 parity
between the Argentine peso
and the U.S. dollar
) was floated
, and the peso devalued
quickly, producing higher-than-average inflation
.
Large-scale debt restructuring
was needed urgently, since the debt had become unpayable. However, the Argentine government met severe challenges trying to refinance
its debt. Creditors (many of them private citizens in Spain
, Italy
, Germany
, Japan
and other countries, who had invested
their savings and retirement
pension
s in debt bonds
) denounced the default; the Italian government lobbied against Argentina in international forums. Vulture fund
s who had acquired sovereign bonds during the critical moments, at very low prices, asked to be repaid immediately.
The state had no spare money at the time, and the Central Bank's foreign currency reserves
were almost depleted. (Moreover, whatever amount left was needed to control the availability of dollars in the local market, in order to prevent further devaluation of the peso.) For four years, Argentina was a pariah, effectively shut out of the international financial markets.
Even as the economic situation improved, the amount of the debt was still the largest defaulted debt in history (about 93 billion USD), and Argentina was in no position to pay without sacrificing essential parts of its budget
.
The Argentine government kept a firm stance, and finally got a deal by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value (25–35% of the original) and at longer terms. Among these bonds, some are indexed based on the future economic growth of Argentina.
The terms of the debt exchange were not accepted by some of the private debt holders (amounting to a quarter of the debt). The IMF used to lobby for these holdouts, but its position has been greatly weakened by the anticipated payment made in January 2006.
In 2010, the debt exchange was re-opened to holders of the debt.
s and other currencies. Due to the full payment of the IMF's debt and several other adjustments, as of January 2006 the total figure decreased to 124,300 million USD.
Debt bonds not exchanged in 2005 accounted for 23,381 million USD, of which 12,688 million were already overdue. Because of the lack of payment to these creditors, Argentina is the only member of the G-20 that is unable to raise capital in the international financial markets.
Individual creditors worldwide, who represent about one third of this group, have mobilized to seek repayment from the Argentine state. Among the most prominent are The Task Force Argentina, an Italian retail bondholder association, and Mark Botsford, a private U.S. citizen retail bondholder.
The American Task Force Argentina, sponsored by a New York sovereign debt fund, states their ultimate aim is to bolster the stability of global credit markets; work towards an equitable outcome for remaining creditors; ensure the integrity of U.S. law; and strengthen crucial bilateral relations between the United States and Argentina.
The Nobel Prize
economist Joseph Stiglitz repeatedly criticized the IMF and supported the Argentine strategies on the debt restructuring, but opposed the disindebtment policy, suggesting instead that the IMF should receive the same treatment as the other creditors.
The main criticisms of disindebtment were, in the first place, that the large amounts of money used to pay off IMF debt were made unavailable for productive purposes within Argentina or to come to terms with outstanding creditors; and second, that the government traded cheap IMF credits for new emissions of public debt at much higher interest rates.
Argentina made some minor payments beforehand, but the main one, for about $9.5348 billion, was delayed for accounting reasons and paperwork, and was finally made on 3 January 2006. The debt was in fact denominated in Special Drawing Rights
(a unit employed by the IMF and calculated over a basket of currencies). The Argentine Central Bank
called on the Bank for International Settlements
in Basel, Switzerland
, where a part of its currency reserves were deposited, to act as its agent. The BIS bought 3.7817 billion SDR (equivalent to about $5.417 billion USD) from 16 central banks and ordered their transfer to the IMF. The rest (2.874 billion SDR or $4.117 billion USD) was transferred from Argentina's account in the IMF, deposited in the U.S. Federal Reserve.
The payment served to cancel the debt installments that were to be paid in 2006 ($5.082 billion), 2007 ($4.635 billion), and 2008 ($432 million). This disbursement represented 8.8% of the total Argentine public debt and decreased the Central Bank's reserves by one third (from $28.045 to $18.575 billion). According to the official announcement, it also saved about $1 billion in interest, though the actual savings amounted to $842 million (since the reserves that were in the BIS were until then receiving interest payments).
The initial announcement was made in a surprise press conference that quickly became crowded. President Kirchner said that, with this payment, "we bury an ignominious past of eternal, infinite indebtment." Many of those present later called the decision "historic". The head of the IMF, Rodrigo Rato
, saluted it, though remarking that Argentina "faces important challenges ahead". United States Secretary of the Treasury
John Snow
said that this move "shows good faith" on the part of the Argentine government.
The day after the announcement, the price of the U.S. dollar in pesos jumped and then stabilized on 3.07 pesos (a 1.3% devaluation); the Central Bank was forced to sell $270 million in the market. The peso-denominated Argentine debt bonds declined by 3% and the Buenos Aires Stock Exchange lost 1.9%. After the initial surprise, reactions to the move were mixed, and the markets became quiet in a few days. Both President Kirchner and the Ex-Minister of Economy Felisa Miceli
assured the public that the measure would have a "neutral effect" in the economy, since the Central Bank's dollar reserves were still enough to buy the whole monetary base
.
Some analysts pointed out that the payment was more a political move than a thought-out economic strategy, but disagreed on their assessment of its long-term consequences. Minister Miceli said that the policy of accumulation of foreign currency reserves would continue and that the Central Bank would attempt to buy all the dollars that entered the market through international trade in 2006.
The Central Bank's reserves surpassed their pre-payment levels on 27 September 2006. As a result of its aggressive buying strategy, the exchange rate increased 8% in one year, reaching 3.12 pesos per dollar.
bought $500 million Argentine bonds (Boden 2015) which were due to the IMF
. This was decided by Chavez two years earlier during Tabaré Vázquez
's inauguration as President of Uruguay
. This trade of bonds would be the Argentine apport to the third emission of Bono del Sur by the Chávez administration.
From 2005 to 2006, Venezuela had already bought more than $3 billion bonds from Argentina, issued by the Argentine government following the debt restructuring. In total, Venezuela bought more than $5 billion bonds from Argentina since 2005.
The 2010 re-opening brings the total amount of debt restructured to 92.6% (the original 2005 debt exchange restructured 76.2% of Argentine government debt in default since 2001). The final settlement of the 2010 debt exchange took place on August 11, for bondholders that didn't participate in the early tranche
that closed on May 14 and settled on May 17.
Argentina
Argentina , officially the Argentine Republic , is the second largest country in South America by land area, after Brazil. It is constituted as a federation of 23 provinces and an autonomous city, Buenos Aires...
went through an economic crisis
Argentine economic crisis (1999-2002)
The Argentine economic crisis was a financial situation, tied to poilitical unrest, that affected Argentina's economy during the late 1990s and early 2000s...
beginning in the mid-1990s, with full recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
between 1999 and 2002; though it is debatable whether this crisis has ended, the situation has been more stable, and improving, since 2003.
Argentina default
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
ed on part of its external debt
External debt
External debt is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such...
at the beginning of 2002. Foreign investment fled the country
Capital flight
Capital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event and that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic...
, and capital flow towards Argentina ceased almost completely. The currency exchange rate (formerly a fixed 1-to-1 parity
Fixed exchange rate
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.A fixed exchange rate is usually used to...
between the Argentine peso
Argentine peso
The peso is the currency of Argentina, identified by the symbol $ preceding the amount in the same way as many countries using dollar currencies. It is subdivided into 100 centavos. Its ISO 4217 code is ARS...
and the U.S. dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
) was floated
Floating exchange rate
A floating exchange rate or fluctuating exchange rate is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency....
, and the peso devalued
Devaluation
Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged....
quickly, producing higher-than-average inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
.
Large-scale debt restructuring
Debt restructuring
Debt restructuring is a process that allows a private or public company – or a sovereign entity – facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its...
was needed urgently, since the debt had become unpayable. However, the Argentine government met severe challenges trying to refinance
Refinancing
Refinancing may refer to the replacement of an existing debt obligation with a debt obligation under different terms. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic factors such as, inherent risk, projected risk, political...
its debt. Creditors (many of them private citizens in Spain
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
, Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
, Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
and other countries, who had invested
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
their savings and retirement
Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...
pension
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
s in debt bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
) denounced the default; the Italian government lobbied against Argentina in international forums. Vulture fund
Vulture fund
A vulture fund is a private equity or hedge fund that invests in debt issued by an entity that is considered to be very weak or dying, or whose debt is in imminent default. The name is a metaphor comparing these investors to vultures patiently circling, waiting to pick over the remains of a rapidly...
s who had acquired sovereign bonds during the critical moments, at very low prices, asked to be repaid immediately.
The state had no spare money at the time, and the Central Bank's foreign currency reserves
Reserve currency
A reserve currency, or anchor currency, is a currency that is held in significant quantities by many governments and institutions as part of their foreign exchange reserves...
were almost depleted. (Moreover, whatever amount left was needed to control the availability of dollars in the local market, in order to prevent further devaluation of the peso.) For four years, Argentina was a pariah, effectively shut out of the international financial markets.
Even as the economic situation improved, the amount of the debt was still the largest defaulted debt in history (about 93 billion USD), and Argentina was in no position to pay without sacrificing essential parts of its budget
Budget
A budget is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods...
.
The Argentine government kept a firm stance, and finally got a deal by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value (25–35% of the original) and at longer terms. Among these bonds, some are indexed based on the future economic growth of Argentina.
The terms of the debt exchange were not accepted by some of the private debt holders (amounting to a quarter of the debt). The IMF used to lobby for these holdouts, but its position has been greatly weakened by the anticipated payment made in January 2006.
In 2010, the debt exchange was re-opened to holders of the debt.
2005 -2006
In the June 2005 report by the Ministry of Economy, the total acknowledged debt of the Argentine state amounted to 126,466 million USD, down by 63,464 million from the first semester as a result of the restructuring process; of this, 46% was denominated in dollars, 36% in pesos, and 11% in euroEuro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
s and other currencies. Due to the full payment of the IMF's debt and several other adjustments, as of January 2006 the total figure decreased to 124,300 million USD.
Debt bonds not exchanged in 2005 accounted for 23,381 million USD, of which 12,688 million were already overdue. Because of the lack of payment to these creditors, Argentina is the only member of the G-20 that is unable to raise capital in the international financial markets.
Individual creditors worldwide, who represent about one third of this group, have mobilized to seek repayment from the Argentine state. Among the most prominent are The Task Force Argentina, an Italian retail bondholder association, and Mark Botsford, a private U.S. citizen retail bondholder.
The American Task Force Argentina, sponsored by a New York sovereign debt fund, states their ultimate aim is to bolster the stability of global credit markets; work towards an equitable outcome for remaining creditors; ensure the integrity of U.S. law; and strengthen crucial bilateral relations between the United States and Argentina.
Disindebtment policy
During the restructuring process, the International Monetary Fund was considered a "privileged creditor", that is, all debt was recognized and paid in full. In 2005 Argentina shifted from a policy of constant negotiation and refinancing with the IMF to payment in full, taking advantage of a large and growing fiscal surplus due to rising commodity prices, with the acknowledged intention of gaining financial independence from the IMF.The Nobel Prize
Nobel Prize
The Nobel Prizes are annual international awards bestowed by Scandinavian committees in recognition of cultural and scientific advances. The will of the Swedish chemist Alfred Nobel, the inventor of dynamite, established the prizes in 1895...
economist Joseph Stiglitz repeatedly criticized the IMF and supported the Argentine strategies on the debt restructuring, but opposed the disindebtment policy, suggesting instead that the IMF should receive the same treatment as the other creditors.
The main criticisms of disindebtment were, in the first place, that the large amounts of money used to pay off IMF debt were made unavailable for productive purposes within Argentina or to come to terms with outstanding creditors; and second, that the government traded cheap IMF credits for new emissions of public debt at much higher interest rates.
Anticipated payment
On 15 December 2005 President Kirchner announced his intention of liquidating all the remaining debt to the IMF, in a single payment of $9.810 billion USD, initially planned to take place before the end of the year (a similar move had been announced by Brazil two days before, and it is understood that the two measures were to be coordinated).Argentina made some minor payments beforehand, but the main one, for about $9.5348 billion, was delayed for accounting reasons and paperwork, and was finally made on 3 January 2006. The debt was in fact denominated in Special Drawing Rights
Special Drawing Rights
Special Drawing Rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund . Not a currency, SDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged...
(a unit employed by the IMF and calculated over a basket of currencies). The Argentine Central Bank
Banco Central de la República Argentina
-Overview:Established by six Acts of Congress enacted on May 28, 1935, the bank replaced Argentina's Currency board, which had been in operation since 1890...
called on the Bank for International Settlements
Bank for International Settlements
The Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
in Basel, Switzerland
Basel
Basel or Basle In the national languages of Switzerland the city is also known as Bâle , Basilea and Basilea is Switzerland's third most populous city with about 166,000 inhabitants. Located where the Swiss, French and German borders meet, Basel also has suburbs in France and Germany...
, where a part of its currency reserves were deposited, to act as its agent. The BIS bought 3.7817 billion SDR (equivalent to about $5.417 billion USD) from 16 central banks and ordered their transfer to the IMF. The rest (2.874 billion SDR or $4.117 billion USD) was transferred from Argentina's account in the IMF, deposited in the U.S. Federal Reserve.
The payment served to cancel the debt installments that were to be paid in 2006 ($5.082 billion), 2007 ($4.635 billion), and 2008 ($432 million). This disbursement represented 8.8% of the total Argentine public debt and decreased the Central Bank's reserves by one third (from $28.045 to $18.575 billion). According to the official announcement, it also saved about $1 billion in interest, though the actual savings amounted to $842 million (since the reserves that were in the BIS were until then receiving interest payments).
The initial announcement was made in a surprise press conference that quickly became crowded. President Kirchner said that, with this payment, "we bury an ignominious past of eternal, infinite indebtment." Many of those present later called the decision "historic". The head of the IMF, Rodrigo Rato
Rodrigo Rato
Rodrigo de Rato y Figaredo is a Spanish political figure who served in the government of Spain as Minister of the Economy from 1996 to 2004; a member of the conservative People's Party , he was also First Deputy Prime Minister from 2003 to 2004...
, saluted it, though remarking that Argentina "faces important challenges ahead". United States Secretary of the Treasury
United States Secretary of the Treasury
The Secretary of the Treasury of the United States is the head of the United States Department of the Treasury, which is concerned with financial and monetary matters, and, until 2003, also with some issues of national security and defense. This position in the Federal Government of the United...
John Snow
John W. Snow
| image=John W. Snow.jpg|imagesize = 250px| order=73rd| title=United States Secretary of the Treasury| term_start=February 3, 2003| term_end=June 28, 2006| predecessor=Paul O'Neill| successor=Henry Paulson| birth_date=| birth_place=Toledo, Ohio...
said that this move "shows good faith" on the part of the Argentine government.
The day after the announcement, the price of the U.S. dollar in pesos jumped and then stabilized on 3.07 pesos (a 1.3% devaluation); the Central Bank was forced to sell $270 million in the market. The peso-denominated Argentine debt bonds declined by 3% and the Buenos Aires Stock Exchange lost 1.9%. After the initial surprise, reactions to the move were mixed, and the markets became quiet in a few days. Both President Kirchner and the Ex-Minister of Economy Felisa Miceli
Felisa Miceli
Felisa Miceli is an Argentine economist, and a former Minister of Economy and Production of Argentina...
assured the public that the measure would have a "neutral effect" in the economy, since the Central Bank's dollar reserves were still enough to buy the whole monetary base
Monetary base
In economics, the monetary base is a term relating to the money supply , the amount of money in the economy...
.
Some analysts pointed out that the payment was more a political move than a thought-out economic strategy, but disagreed on their assessment of its long-term consequences. Minister Miceli said that the policy of accumulation of foreign currency reserves would continue and that the Central Bank would attempt to buy all the dollars that entered the market through international trade in 2006.
The Central Bank's reserves surpassed their pre-payment levels on 27 September 2006. As a result of its aggressive buying strategy, the exchange rate increased 8% in one year, reaching 3.12 pesos per dollar.
Venezuelan government buys Argentine bonds
In August 2007, the President of Venezuela Hugo ChávezHugo Chávez
Hugo Rafael Chávez Frías is the 56th and current President of Venezuela, having held that position since 1999. He was formerly the leader of the Fifth Republic Movement political party from its foundation in 1997 until 2007, when he became the leader of the United Socialist Party of Venezuela...
bought $500 million Argentine bonds (Boden 2015) which were due to the IMF
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
. This was decided by Chavez two years earlier during Tabaré Vázquez
Tabaré Vázquez
Tabaré Ramón Vázquez Rosas is a former President of Uruguay. A physician by training, he is a member of the leftist Frente Amplo coalition . Vázquez was elected president on October 31, 2004, took office on March 1, 2005, and relinquished the office on March 1, 2010...
's inauguration as President of Uruguay
President of Uruguay
The President of the Oriental Republic of Uruguay is the head of state of Uruguay. His or her rights are determined in the Constitution of Uruguay. Conforms with the Secretariat of the Presidency, the Council of Ministers and the Director of the Office of Planning and Budget, the executive branch...
. This trade of bonds would be the Argentine apport to the third emission of Bono del Sur by the Chávez administration.
From 2005 to 2006, Venezuela had already bought more than $3 billion bonds from Argentina, issued by the Argentine government following the debt restructuring. In total, Venezuela bought more than $5 billion bonds from Argentina since 2005.
Argentina Re-opens Debt Exchange in 2010
In June, Argentina completed the reopening of its 2005 debt exchange and on July 1, announced the results. A total of approximately $12.86 billion of eligible debt was tendered into the exchange that launched on April 30, 2010. The total amount tendered represented 69.5% of the debt eligible to be tendered.The 2010 re-opening brings the total amount of debt restructured to 92.6% (the original 2005 debt exchange restructured 76.2% of Argentine government debt in default since 2001). The final settlement of the 2010 debt exchange took place on August 11, for bondholders that didn't participate in the early tranche
Tranche
In structured finance, a tranche is one of a number of related securities offered as part of the same transaction. The word tranche is French for slice, section, series, or portion, and is cognate to English trench . In the financial sense of the word, each bond is a different slice of the deal's...
that closed on May 14 and settled on May 17.
External links
- http://www.cnbc.com/id/15840232?play=1&video=1528561740 - CNBC Interview with Robert Koenigsberger
- http://www.ft.com/cms/s/0/a9644868-7e28-11df-94a8-00144feabdc0.html - Financial Times, June 2010
- Banco Central de la República Argentina - Argentina's Central Bank website, with various economic statistics available on the fly.
- Interessengemeinschaft Argentinien e. V. (non-profit-association of creditors involved in the restructuring, based in Germany).
- Argentina and the IMF on the IMF website.
- Associazione per la Tutela degli Investitori in Titoli Argentini/Task Force Argentina (pressure group based in Rome, representing the interests of default bondholders in Italy).
- American Task Force Argentina (pressure group based in Washington, D.C., representing the interests of institutional default bondholders in the U.S., and co-chaired by Robert J. ShapiroRobert J. ShapiroRobert J. Shapiro is co-founder and chairman of , a United States private finance consultancy that has built a reputation on a range of economic policy issues, including climate change, intellectual property, and finance. He is known for warning of the dangers of naked short selling...
, former U.S. Undersecretary of Commerce in the Clinton Administration, and Nancy SoderbergNancy SoderbergNancy Soderberg is an American foreign policy strategist who held several senior level positions in the Clinton administration. She currently is President of the Connect US Fund in Washington DC and resides in Jacksonville, Florida where she is a Distinguished Visiting Scholar at the University...
, member of the National Security Council under Clinton). - Global Committee of Argentina Bondholders (global association of Argentina bondholder groups and committees from around the world, representing holders of over US$39 billion in debt. It includes more than 500,000 retail investors and more than 100 institutions, banks, partnerships and committees).