heading towards default

["Ian Murray" <seamus2001@xxxxxxxx>]

Argentine Rates Surge as Fears of Debt Default Grow
Chance of New Bailout Considered Slim

By Anthony Faiola and Paul Blustein
Washington Post Staff Writers
Saturday, November 3, 2001; Page E01



BUENOS AIRES, Nov. 2 -- One day after the Argentine government
announced plans to restructure its crushing debt, bank lending rates
and government bond yields soared, reflecting a growing belief that
the country is headed for default with little chance of another
international bailout.

The International Monetary Fund and finance ministers of the Group of
Seven leading industrial countries issued statements that, while
praising Buenos Aires for seeking a debt restructuring, offered no
hint they are willing to provide new loans -- a deliberate omission,
according to officials in Washington.

"We are pleased that Argentina is taking the initiative," the G-7
statement said, referring to the government's plan, unveiled Thursday,
to induce its creditors to swap about $100 billion in high-yielding
bonds for securities paying much lower interest rates. "It is
important for Argentina to return to an economically sustainable
path," the statement said.

That wording, analysts said, strongly indicated that this time, Latin
America's third-largest economy will not be rescued from the prospect
of default. If so, it would mark the first case in which the Bush
administration had acted in accord with its vows to limit
international bailouts; earlier this year, the administration bowed to
pressure to rescue Turkey and go along with a $5 billion increase in
Argentina's $14 billion IMF loan.

"I would interpret what is happening as the Bush administration
finally letting a country solve its problems with its creditors
without the benefit of a large international financing package," said
Michael Mussa, a fellow at the Institute for International Economics
who recently retired as the IMF's chief economist.

Although many economists agree that Argentina has run out of
alternatives to default, the consequences are likely to be painful for
a country that has suffered through a brutal 40-month recession that
has sent unemployment and poverty soaring, dramatically lowering the
standard of living for millions of people. A default would likely
deepen the recession and prompt lenders to shy away from the country
for years, putting pressure on Argentine companies that need foreign
financing.

Concerned Argentines have been pulling cash for several days from
banks, which stand to suffer major losses in a default. If a
full-blown bank run materializes, with people dumping pesos for U.S.
dollars, the government could be forced to abandon its system of
pegging the peso to the dollar at a one-for-one rate. Argentina
created the fixed-rate currency in 1991 in an action crucial to ending
runaway hyperinflation.

Under the currency system, the debts of most Argentines, from car
loans to home mortgages, are denominated in dollars. Accordingly, a
devaluation would lead to a devastating number of personal and
corporate bankruptcies.

Argentine government officials had hinted in recent days that they
were hoping for additional financial aid from the IMF or other
international lenders that could be used to make it attractive for
bondholders to swap their securities -- by offering, for example, a
guarantee of payments. But President Fernando De la Rua said today
that Argentina would not seek it.

As a result, analysts voiced skepticism that the government could
fulfill its pledge to conduct the debt restructuring in a "voluntary"
fashion. Moody's Investors Service and Standard & Poor's Corp. have
said they will cut Argentina's credit ratings to default levels if the
restructuring results in losses for bondholders, and rating agency
Fitch today cut its rating to only two notches above default status.

"We still need to thoroughly review the details, but there is nothing
in [Thursday's] decree that indicates there will be any compensation
for the lost interest to investors," said Jane Eddy, Standard & Poor's
managing director for sovereign ratings. "The question remains whether
or not there will be any kind of valuable compensation, but at this
moment, it certainly doesn't jump out at you."

One reason Washington could allow an Argentine default is that the
effect on other countries may well be limited, even though it would
come at a time when the world economy is slowing, and even though
Argentine bonds account for a sizable chunk of the emerging-market
bonds held abroad.

Sure enough, although Argentine bonds fell today, there was only a
slight effect in other emerging markets. That was true even in
neighboring Brazil, where the prices of benchmark bonds edged higher.
In part, the muted reaction stemmed from the fact that, amid political
bedlam in Argentina, economists have been predicting a crisis for
months.

But the risks of "contagion," which was so severe after Russia's
default in 1998, are by no means absent in a region with bad memories
of domino-effect debt crises dating back to the early 1980s. In
Brazil, which is Latin America's largest nation and Argentina's
leading trading partner, the currency, the real, has plunged 40
percent in recent months as Argentina's financial crisis has simmered,
and foreign investment has dropped as well.

A default in Argentina, combined with the intensified threat of a
devaluation of the peso, would presumably force Brazil to defend its
currency by hiking interest rates and using precious reserves of
dollars to buy reais. The Brazilian government could also be forced to
adopt unpopular austerity measures, putting the brakes on the already
slowing economy.

But many economists believe that Brazil is far better prepared to
withstand an Argentina default now than it was three years ago, when
the fallout of the Asian and Russian financial crises led to a forced
devaluation of the real.

In the past three years, the administration of Brazil's President
Fernando Henrique Cardoso has reined in runaway government spending,
generating a primary budget surplus of roughly 3 percent. Confidence
in Brazil's fiscal policy was key in winning $15 billion in loan
guarantees from the IMF in August, money Brazil can now draw on in a
cash crunch.

Also, Brazil is expected to post its first trade surplus in seven
years during 2001, and its lower cost structure has helped lure
hundreds of manufacturers from across the Argentine border.

"We've taken the necessary precautions to insulate ourselves" from an
Argentine default, Sergio Amaral, Brazil's minister for trade and
industry, said in a telephone interview from Brasilia. " . . . I have
no doubt that investors will recognize that."