Sharing the Blame

Global Finance, Jun 2005 by Keeler, Dan

Argentina's finance minister, Guillermo Nielsen, was clearly thrilled last month when he learned that his country had won a resounding victory in its battle to push through its controversial debt swap deal (see cover story, page 12). But even he must have been aware that there is every chance the victory will turn out to be a Pyrrhic one.

By forcing through such a draconian settlement, Argentina has arguably done a disservice to the world's emerging markets. Already wary, investors will almost certainly be looking for richer returns when they lend to emerging markets in future. Added to that, Argentina's move comes at a time when many yield-hungry investors have been becoming interested in emerging markets debt for the first time. Those that have not already taken the plunge may well back off after seeing their peers taking such a severe haircut on their Argentine bonds.

It remains to be seen whether Argentina's actions will provoke a long-term backlash among lenders to the emerging markets. Certainly, calls will grow for an international court to administer sovereign defaults-something many wealthier nations have been hankering after for years. The establishment of such a court is by no means a foregone conclusion, though, as even some of its proponents are concerned that its existence could actually encourage sovereign defaults.

They are right to be skeptical. The court proposal is backed by the IMF, which was one of the chief cheerleaders that helped to inflate the Argentine bubble. Some contend the IMF is as much to blame for the Argentine default as was Argentina itself, claiming it was behind many of the policy mistakes that led to the eventual financial maelstrom in 2001 .Whether this is true or not, the organization should certainly shoulder some of the responsibility for Argentina's financial crisis.

Ultimately, Argentina may be the only nation to suffer in the longer term from the fallout after the debt swap. Emerging markets investors should be smart enough to recognize that one country's default will not necessarily trigger a rash of other copycat defaults. Once the shock subsides, they should revert to valuing emerging markets risk rationally on a case-by-case basis. They will continue to treat Argentina with extreme caution, though, and it is this fact that will cause Argentina the most pain. Revitalizing its economy is dependent on improving its infrastructure and accomplishing that will take a great deal of foreign investment. For the foreseeable future, that will be hard to come by.

Until next month,

Dan Keeler

dan@gfmag.com

Dan Keeler

dan@gfmag.com