Is Argentina using its latest restructuring to pay back grudges as well as debts?
By Deepak Gopinath
December 2002
Institutional Investor Magazine
It seems that way to some Wall Street financiers. They point out that Buenos Aires announced last month that investment banks involved in underwriting the country’s debt in the two years before its December 2001 default would not be invited to participate in restructuring its $95 billion foreign debt now. The proffered reason: Argentinean officials are still bitter over what they consider exorbitant fees on deals from that era that helped to push the country into default.
“Argentina is trying to play hardball with the market, which the country sees as the source of the crisis,” says Ricardo Amorim, who leads Latin America coverage at New Yorkbased independent research firm Ideaglobal. “Argentina is going against its own interests.” Nevertheless, the bruised feelings only worsened when the country had to default recently on an $805 million World Bank loan (it did pay $79 million in interest) while negotiating an all-important IMF funding package.
The government is not trying to exact revenge on bankers, insists Argentina’s finance secretary, Guillermo Nielsen. In an interview with Institutional Investor, he argues that the country had little choice but to exclude certain banks from future deals and that it had even less maneuvering room on the World Bank default.
Nielsen contends that the government was actually protecting the banks, a group that includes virtually all the major global players. “To have these banks participating in the role of financial adviser would create a conflict of interest, because they were selling Argentina’s promises to pay, and now they will have to tell [investors] that those promises are not going to be fulfilled,” says Nielsen, a graduate of the London School of Economics. “Some of these guys would get sued if they took both roles, and rightly so. We need people with credibility.”
Just the same, Argentineans resent the fees generated by some of the predefault deals. Particularly controversial was a $30 billion June 2001 debt swap, arranged by a Credit Suisse First Bostonled consortium, that didn’t do much to stem the economy’s slide but hit Buenos Aires with $137 million in fees.
Nielsen, 51, denies that barring the banks was either retaliatory or a bid to garner political points. “There is no blacklisting; there is nothing wrong with [the banks]. At the time, they did their job in the best possible way that they could,” says the finance secretary. “But this job is totally different from the previous one, and we need a different profile to do it.”
The banks are reluctant to say anything about a long-standing customer. Citigroup, CSFB and Deutsche Bank decline to comment, and a J.P. Morgan spokesperson merely notes that “Argentina has been and continues to be an important client of this firm.”
What of the World Bank default? Nielsen, who leads Argentina’s IMF negotiations, contends that the cash-strapped government had no choice but to suspend payments, given differences over fiscal targets as well as the lack of local political consensus on the direction of economic reform.
“We have paid $4.3 billion to the international financial institutions since the crisis began, and that is a lot of money for a country that had less than $9 billion in reserves,” says Nielsen. “We reached a point that if we continued paying without having an IMF agreement in sight, by February we would be losing control of the macroeconomy of Argentina.”
Withholding payment on the World Bank loan protects the caretaker government of President Eduardo Duhalde from being held liable for draining reserves should IMF negotiations fail. It also increases the pressure on the IMF to make a deal.
Neither side wants Argentina to default on its IMF debt, which could delay the country’s reentry into global capital markets and encourage other debt-ridden nations to follow suit.
Many market observers expect the IMF to blink, offering a short-term deal to tide Argentina over until next spring’s elections. The World Bank default “is not a threat; it is not blackmail,” says Nielsen. “This should never have happened. But, as they say, ‘it takes two to tango.’”
