>>Chances of New Global Crisis Played Down, but Risks Remain
By Paul Blustein
Washington Post Staff Writer
Saturday, July 14, 2001; Page E01
The last time a big country defaulted on its debt was August 1998 when Russia went bust, an event that triggered financial chaos, nearly paralyzing Wall Street's capacity to provide credit to American businesses.
Now the prospect of a similar episode has arisen as analysts have concluded that Argentina will soon be forced to acknowledge that it cannot repay its debts in full.
The global financial system has become more resilient in many ways over the past couple of years, sharply reducing the chances for a repetition of the events of 1998, according to policymakers and private economists.
But the Argentine crisis is erupting during a period of sluggishness in the world's biggest economies -- the United States, Europe and Japan -- and in that respect the current situation is worrying the stewards of the global economy even more.
Asked yesterday about the potential impact of an Argentine default, Stanley Fischer, first managing director of the International Monetary Fund, said many other emerging markets, notably Mexico and Brazil, are better able to withstand such shocks today than they were several years ago. That is in part because they no longer maintain pegged currencies that are vulnerable to sudden, catastrophic selling waves. Furthermore, Fischer said in a telephone news conference, nations in Asia -- where the last crisis started -- have reduced their debt and accumulated large reserves of dollars.
But, Fischer added: "The last thing anybody should do is be complacent about anything untowards that would happen in the global economy at a time of general weakness, and there is general weakness because the industrialized countries are not growing very fast -- or, in the Japanese case, are probably in recession. . . . It's a mixed picture. There would certainly be no desire to find out" what would happen if Argentina defaulted.
Argentina took a step back from the brink yesterday, as a key member of the ruling coalition, former President Raul Alfonsin, said he would "join in a show of patriotic force" by backing a package of spending cuts and tax-enforcement measures that had been hastily unveiled Wednesday in an effort to boost market confidence. The panicky atmosphere that pervaded the markets earlier in the week eased, and the country's main stock index rose 5.6 percent, recouping much of the previous day's 8.2 percent loss.
But skepticism abounds that Argentina, which shows no sign of emerging from a three-year recession, can muster the resources to pay the $130 billion in debt that its government owes to creditors at home and abroad. "It's unsustainable. It's just a matter of time" before the government must acknowledge that it cannot service the debt, said Rodrigo Sacca, an economist who covers Argentina for Stone & McCarthy in Mexico City.
Privately, even some Wall Streeters -- the very holders of the bonds Argentina has issued to cover its debt -- agree that the most sensible thing Argentina could do is declare it must seek an agreement with its creditors for a negotiated reduction in the amount it owes.
But the costs of such a move might be considerable. Not only would the Argentine government and Argentine companies have to pay much higher interest rates for years to obtain foreign capital, but the confidence Argentines have in keeping their money at home would almost certainly erode, said William Cline, the chief economist of the Institute of International Finance, an organization of banks, investment firms and other financial institutions.
"There has been much less of a problem in Argentina with capital flight in the '90s than in the '80s, so [default] is certainly something to be avoided," Cline said.
Even more difficult to foretell is how other countries, and the global financial system in general, might be affected. Russia's default and devaluation of the ruble shocked investors in part because they were thunderstruck that the IMF was allowing such a fate to befall a country with a vast stockpile of nuclear weapons. Market participants fled to the safety of U.S. Treasury bonds, dumping large numbers of higher-risk corporate and foreign bonds.
That in turn triggered the collapse of a giant but little-known hedge fund, Long-Term Capital Management, which had placed enormous bets that bonds would move in the opposite direction. The hedge fund's woes caused greater sell-offs of bonds with any sort of risk -- even bonds of relatively sound U.S. corporations. For a couple of weeks, it appeared that the bond market, which supplies the majority of capital to American businesses, might cease functioning properly.
Memories of that confounding set of chain reactions remain vivid. Thus, while many experts agree that default might be the only option left to Argentina -- and might serve a useful purpose by reminding investors they won't always be bailed out -- they are nervous about the fallout.
"There is a good analogy with forest fires," said Daniel Tarullo, who was President Bill Clinton's chief international economic adviser. "There are times when the long-term health of the forest requires you to let a fire burn. But under those circumstances, we trust that the Forest Service has erected fire walls and has a bunch of contingency plans." <<
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