October 30, 2001 Cavallo Appears to Be Prepared
To Let Argentina Default on Debt
By PAMELA DRUCKERMAN and MICHELLE WALLIN
Staff Reporters of THE WALL STREET JOURNAL
BUENOS AIRES -- Hoping to force Argentina's long debt crisis to an endgame, Economy Minister Domingo Cavallo appears to be laying the groundwork for the country to default on its debt. At the same time, he is pressing the International Monetary Fund and other lenders to underwrite a separate strategy that wouldn't involve a forced debt restructuring.
The strategy is a high-stakes game of dare for Argentina, whose teetering debt load makes up about one-quarter of all emerging-market bonds. A default on its roughly $95 billion in bonds -- out of a total of $132 billion in government debt -- would easily be the biggest-ever bond restructuring by a developing nation, and could send shudders throughout Latin America and other regions.
Argentine financial markets, which have been sagging for months on the expectation that the government wouldn't find an easy way out of its debt mess, assumed the worst Monday and sent the value of the country's debt to lows not seen since the mid-1990s. Some Argentine bonds plunged to less than 50 cents on the dollar, reflecting the view that the IMF and other lenders won't pony up enough money to avert a default.
Speaking to reporters late Monday, Mr. Cavallo said foreign and domestic investors have nothing to fear. "People who have placed their faith in Argentina ... must know that the goal of our plans is to honor that confidence."
The firebrand Mr. Cavallo, known for seat-of-the-pants policy shifts that often unsettle financial markets and sometimes surprise his own advisers, said over the weekend that he is seeking a comprehensive way of reducing Argentina's debt. He is expected to announce his plans in the next few days.
Mr. Cavallo made a stealth visit to New York last week, apparently seeking to drum up more support from lenders, including the IMF, the World Bank and the Inter-American Development Bank. The minister would like to avoid a forced debt restructuring by getting new loans that could be used to buy back debt or serve as collateral for a voluntary debt swap.
In theory, investors would agree to such a plan because they would get new bonds worth more than the ones they now own. In August, the IMF said $3 billion in new loans for Argentina could be disbursed early to support such an operation. IMF and World Bank spokesmen declined to comment Monday, as did officials at Argentina's economy ministry.
Economists say Mr. Cavallo is also trying to brace the public for the possibility that new money won't come through and that bondholders will be pressed to trade their existing debt for bonds of lesser value -- essentially a default. That scenario began appearing more likely last week after the federal government failed to reach a much-awaited agreement with provincial governors on a revenue-sharing arrangement.
An official at Merrill Lynch & Co. denied a report published Monday that the firm had been selected by Argentina to help restructure its debt.
Mr. Cavallo -- whose popularity has waned since he took office in March as an economic white knight and who still has not said outright that he favors a default -- is walking a tricky line in discussing debt restructuring. He wants to remove the debt strain from Argentina's weakened economy without setting off a popular panic that could lead to a run on deposits at local banks. Many Argentines actually support some sort of debt restructuring, but their confidence in the nation's economy is fragile after almost four years of recession that have pushed unemployment to an estimated 18%. Economists say any debt-restructuring plan will be followed by new measures aimed at reviving the economy.
A market already wary of the debt transaction came unraveled even further Monday afternoon, after the Economy Ministry confirmed that Julio Dreizzen, a top debt official, resigned. The ministry said Mr. Dreizzen, who as undersecretary of finance played a big role in all of Argentina's major debt deals, is leaving for personal reasons. |
