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April 1, 2004
js-1288 Argentina: Economic Challenges in the Wake of Default
Randal K. Quarles
Assistant Secretary of Treasury for International Affairs
Speech for AEI Conference
March 31, 2004 Overview
The United States has played and continues to play an active role in supporting efforts to reestablish economic stability in Argentina. This includes our support for the eight-month “transitional” IMF program launched in January 2003, which was focused on stabilization and strengthening recovery through the electoral period.
Following the presidential transition in May, Argentina and the IMF developed a three-year program in September 2003 that aims at addressing first, the root causes of the Argentine financial crisis and, second, the new problems created by the crisis. The focus is fixing chronic fiscal weakness, rebuilding the banking sector, and establishing a framework for cooperative engagement with creditors to restructure debt.
Argentina’s debt default is the most complex emerging markets debt restructuring exercise to date. Argentina has approximately $100 billion in private sector claims it is seeking to restructure, when past due interest claims are taken into account. The complexity is not only due to the size of the restructuring, but also to the number of different currencies and legal jurisdictions in which the debt was issued, as well as the number of different types of bondholders involved, including sizeable holdings by retail investors in Italy, Japan, and Germany, and the large number of local Argentine holders. A major challenge of the restructuring effort will be to take into account and craft an offer that will be attractive to different bondholders, while preserving the principle of inter-creditor equity.
A successful debt restructuring is a critical component of Argentina’s economic recovery and will be a measure of the overall success of the IMF program. Argentina will need substantial investment to generate economic growth and raise its living standards over the long term. While Argentina grew robustly last year, the sustainability of the recovery will depend increasingly on restored financial market access, especially access to international capital markets, in order to finance Argentina’s investment needs.
A successful debt restructuring would pave the way for Argentina as a sovereign borrower to return to capital markets. It would also provide a significant boost to Argentina’s corporate sector and its ability to attract international finance, as well as encouraging foreign direct investors. Finally, it would help resolve bank balance sheet problems and, in conjunction with the banking sector strategy laid out in the program, lay the basis for resumed bank lending.
IMF Program/Lending Into Arrears Policy
As you are aware, IMF lending policies require transparent and constructive negotiations by Argentina with its private creditors to secure the broad creditor support in a debt restructuring needed to achieve a sustainable debt situation and facilitate Argentina’s progressive reintegration into international capital markets. Ultimately, the success of the restructuring exercise will be determined by the level of creditor participation and the resolution of outstanding claims.
We see the IMF role as threefold: to help Argentina formulate an effective stabilization and growth strategy, to provide new financing for the period of the program to give Argentina breathing space to implement reforms, and to require good faith negotiations with creditors on a sustainable debt restructuring. But it is not the IMF’s role to impose the terms of the deal. The fiscal component of the program intentionally left the primary surplus for future years unspecified above a 3 percent floor in order to give Argentina and its creditors the flexibility to reach a sustainable agreement.
Second Review Commitments
In its most recent Letter of Intent, prepared in connection with the second IMF program review, Argentina has made a number of important commitments that should advance meaningfully its debt restructuring process.
First, Argentina has committed to engage in constructive negotiations with all representative creditor groups, including the Global Committee for Argentine Bondholders (GCAB). Argentina has committed to ensuring that these discussions are meaningful by taking into account creditors’ proposals in the design of the debt exchange offer. Allowing creditors real input into the design of the offer will help build mutual trust and is the surest way for Argentina to achieve the broad creditor support needed for a comprehensive and sustainable debt restructuring.
We look forward to the upcoming discussions between Argentina and its creditors in Buenos Aires to advance meaningfully the negotiation process needed to reach a sustainable resolution of Argentina’s debt. We urge both sides to move expeditiously in their discussions of possible debt exchange offers and come to a fair, mutually agreeable deal.
Second, Argentina has committed to retaining its recently hired investment bank advisors throughout the restructuring process, as long as the banks meet their contractual obligations. With the recent issuance of the presidential decree, Argentina has formalized the hiring of these advisors and it will now be engaged in an intensive process of working with the banks to advance its debt negotiations. Given the complexity of this restructuring, the role of bank advisors will be key. The banks’ willingness to participate and put their reputational capital at stake is a positive sign regarding the potential for a debt restructuring process that will succeed.
Third, Argentina has committed to finalizing with its investment bank advisors an appropriate minimum participation threshold necessary for a broadly supported restructuring. A minimum participation threshold provides a concrete target to incentivize both the debtor and creditors to reach an agreement that is mutually acceptable, thereby promoting the broad creditor support needed for a successful exchange and debt sustainability. This commitment is important in order to avoid a piecemeal restructuring process.
Conclusion
The United States has been a consistent and forceful advocate for IMF engagement with Argentina and for a successful resolution of Argentina’s debt default. It does not serve the interest of the international community to see Argentina fail in stabilizing its economy or in laying the basis for growth. But Argentina itself has the greatest stake in a successful debt restructuring and we expect Argentina will act in its own long-term interests.
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