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Argentina: Lessons for Ecuador
Latin Business Chronicle
January 02, 2007

Why Ecuador should not follow in Argentina's footsteps.

Oh boy, here we go again. Ecuador's president-elect Rafael Correa, set to assume office in less than two weeks, is promising an Argentine-style debt default. Just what Ecuador, already suffering from years of politcal instability, needs.

And globally, such a debt default could trigger a mini-crisis in financial markets, depending on the tactics the government follows, according to Riordan Roett, director of the Latin America studies program at Johns Hopkins University.

Ironically, a possible Ecuadorian debt default comes five years after Argentina's infamous one. On January 3, Argentina formally declared a debt moratorium, missing a $28 million interest payment due on an Italian lira bond.

"The default covered 152 separate bond offerings issued in eight legal jurisdictions and seven currencies, with a total face value of $81.2 billion and held mainly by U.S., European and Japanese institutional and retail investors," says a recent report from the American Task Force for Argentina (ATFA) . "It was and remains today the largest debt default, sovereign or private, in history."

Combined with other anti-business policies, including a currency reform and bank freeze, the debt default led to one of Argentina's worst economic crises ever. GDP fell by 10.9 percent in 2002, its worst decline in recent history. Foreign direct investment fell to $2.1 billion in 2002, a mere 10 percent of the average during 1992-2001, according to UNCTAD.

Tragically, enough, the results of the debt default were only made worse by the government of President Nestor Kirchner, who assumed office in 2003. In 2005, his government announced it had reached an agreement with 76.2 percent of debt holders to exchange their original debt of $61.8 billion for a lower one of $35.2 billion, according to ATFA.

"Argentina never negotiated with its creditors but instead simply issued a series of take-itor-leave-it proposals," ATFA argues. It also criticizes the fact that the Argentine government's final offer of late 2004 repudiated any obligation to repay interest owed from the time of the default to the restructuring, amounting to $25 billion; provided a much lower value, per dollar of defaulted debt, than other restructurings by developing nations and included provisions repudiating the debts of any bondholders who rejected it, making the proposal a unilateral, take-it-or-leave-it proposition.

While the debt default saved the Argentine government the expenses of serving the debt, it worsened Argentina's economy, sending a loud and clear message to private investors that the South American country no longer respected contracts and agreements. And make no mistake: The debt default caused major damage.

The ATFA estimates global investors lost $84 billion as a result, thanks to direct costs such as capital losses and foregone interest payments incurred by U.S. lenders who accepted the harsh restructuring terms, as well as those who rejected the offer and continue to hold the defaulted bonds. The default also cost those lenders the investment returns that holders of other emerging market bonds enjoyed in 2002-2005.

In addition, indirect costs total nearly $64 billion, the ATFA estimates. The indirect costs include the impact of the peso devaluation triggered by the default on the value of assets in Argentina held by foreign companies, an impact ultimately borne by their shareholders, and the costs to ordinary taxpayers of the tax write-offs and write-downs claimed by the investors who incurred large, direct losses in the default and restructuring.

Then there were three bailout packages from the International Monetary Fund, which ultimately financed by the taxpayers in the member countries, put at risk some $23 billion worldwide and $4 billion from the United States, the ATFA says.

"If Argentina's leaders had heeded the International Monetary Fund and applied more discipline to their domestic fiscal and monetary policies, the IMF would not have suspended its emergency loans and the default might have been avoided entirely, or at least it could have been considerably smaller," the ATFA argues.

We agree. The debt default could have been avoided by sound government policies. Instead, a worsening fiscal situation under Carlos Menem (1989-99) was not properly handled by his successor, Rafael de la Rua (1999-01). But even Eduardo Duhalde, who assumed the presidency in January 2002, could have avoided a debt default if he had the will and decency to do so. "If the Argentine government had offered a restructuring plan that respected the norms of international finance and provided an exchange that would have satisfied all of its lenders, the direct costs for those lenders and the indirect costs imposed on everyone else would have been much smaller," the ATFA says.

So, where does that leave us today, five years after the whole debt mess started? Kirchner is trying to gain respect from European governments in an effort to get some badly-needed investment. He has agreed to repay the Spanish government nearly $1 billion in debt by 2012 and is now trying to renegotiate its $6.3 billion defaulted debt with the rest of the Paris Club. This time around, it won't cut the value of the debt, but try to get the maturities extended.

However, it would hardly be fitting for the Paris Club to reach an agreement without making sure Argentina also compensates properly the private creditors that have outstanding debt and did not accept the 2005 renegotiation terms.

"By the standards and norms of international lending respected by every other nation in the world, the actions of the Argentine government in its sovereign debt default and the unprecedented terms of its subsequent restructuring have been reckless and lawless," ATFA says.

We agree. Argentina needs to amend its past wrongs by making sure its private creditors get their rightful compensation as soon as possible.

U.S. Government
Takes Action

Click here to view letters by the Administration and Members of Congress on Argentina's debt and economic policies.

The Debt and Europe

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ATFA Member Spotlight

National Taxpayer's Union

Open Letter to the U.S. House of Representatives: Protect Taxpayers from Judgment-Evading Nations

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