Political Risk Latin America Blog @PolRiskLatam

Argentina economy: Ending a decade of default

Posted in News and Articles, Political Risk by politicalrisklatam on November 18, 2010

by The Economist Intelligence Unit, November 18th, 2010.

Argentina’s recently widowed president, Cristina Fernández, announced on November 15th that her government would negotiate—without the intervention of the IMF—the payment of between US$6.5bn and US$8bn owed to the Paris Club, the remaining hold-outs from the country’s debt default of 2001. An agreement with the Paris Club should help boost investment in Argentina by easing access to external credit. It will not, however, eliminate investors´ principal concerns relating to rampant inflation, doctored government statistics and interventionist economic policies.

Argentina will close a chapter on the largest sovereign debt default in history should its government and the Paris Club reach a pay-off agreement. In December 2001, in the midst of a major economic meltdown, a provisional president ordered the cessation of payment on public debt totalling nearly US$100bn. More than three-quarters of private creditors subsequently agreed in 2005 to restructure debt worth US$82bn, and some other hold-out bondholders struck a similar deal earlier this year. The government was able to exchange 92% of its outstanding debt and reduce its overall debt load with these debt swaps. But it still owes a hefty sum to the Paris Club, an informal grouping of lenders from the world’s principal economies.

Paris Club members control most of the remaining defaulted debt in various proportions: Germany (30%), Japan (25%), the Netherlands (9%), Italy and Spain (8%), and the US (7%). The Club comprises the main donor countries to international financial institutions and usually works within the IMF and World Bank frameworks when negotiating restructured payment terms. This is an inconvenience for Argentina, which has refused to subject itself to IMF procedures and monitoring since the administration of President Néstor Kirchner (Ms Fernández’s husband and predecessor) paid off its nearly US$10bn debt to the international organisation in January 2006. Breaking ties with the IMF was (and remains) politically popular as the organisation is widely blamed for Argentina’s economic woes leading to the 2001 crash. (continue reading… )

 

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