Argentina's June 1 decision to improve the terms of its $100 billion restructuring proposal was met less than enthusiastically by the same angry investors it was intended to entice. That's because, even after Argentina upped the payment offer, bondholders were still left to take the biggest loss ever registered in a sovereign default: about 75% in net present-value terms, vs. the previous offer's 92%.
In presenting what he called the government's final offer, Economy Minister Roberto Lavagna argued that such a huge haircut was needed if the country hoped to get its galloping public debt under control. If the latest offer prospers, Argentina's debt will stabilize at a level equivalent to 80% of gross domestic product (GDP). That would be a dramatic improvement over its current 130%, but still well above the 57% level seen prior to the country's December, 2001, default.
In making his case for such gigantic debt forgiveness, Lavagna cited the research of Ken Rogoff, who was the chief economist at the International Monetary Fund (IMF) until 2002. Now an economics professor at Harvard, Rogoff's recent research has focused on how highly indebted countries like Argentina can escape the cycle of uncontrolled borrowing and spending that makes them serial defaulters. BusinessWeek Buenos Aires Correspondent Joshua Goodman recently spoke with Rogoff, a former chess master, about Argentina's debt-restructuring proposal and the country's prospects for real debt reduction. Edited excerpts of their conversation follow:
Q: Is Argentina's latest restructuring offer enough to prevent it from falling into another debt crisis?
A: The government's proposal is consistent with its line that it wants a very huge haircut. But even if it succeeds, it will still face a very high risk of default again because its debt-to-GDP ratio would be too high. A 60% ratio is fine for Europe, where the Maastricht Treaty keeps countries in line. However, for a serial defaulter like Argentina, 20% to 25% is the only safe level. If it's stuck with a debt load of 80% to 100%, it'll be back eating soup again in a few years.
Q: Does that mean bondholders are being unreasonable in holding out for more?
A: It's understandable that creditors are livid -- Argentina's long-term interests aren't met by totally alienating the international financial community. But the situation is extraordinarily complex and the debt load very heavy. So far, Argentines have been the ones who have suffered the most pain from default and the devastating five-year depression that preceded it -- the worst in modern history. In the context where they're unlikely to access capital markets for some time anyway, it's understandable they want to bring debt levels down as much as they can.
Q: One might infer from your comments that someone else should pay for Argentina's default?
A: Let's be straight -- most people agree Argentina is the one responsible for getting itself into the debt mess in the first place. Markets aren't irrational for lending to debt-intolerant countries. It's also important to remember that the country has other alternatives, like increasing its fiscal savings or restructuring the other half of the debt that has been issued since default to local investors.
Q: A big chunk of Argentina's debt though, about 24%, is owed to your former boss, the IMF, and other multilateral agencies. Shouldn't they be forced to take a hit along with the rest of Argentina's creditors?
A: It's true the IMF has an extraordinarily high exposure to Argentina. That's what makes the country's debt restructuring so fascinating to follow. Beyond the consequences for Argentina and bondholders, we'll learn a lot about the supposed seniority -- or not -- of multilateral debt.
Q: What else is at stake in the restructuring?
A: Everyone is concerned the precedent it could set for other highly indebted countries. If Argentina achieves a big haircut, people will want to know if this resets the rules for emerging-market investments.