ARGENTINE DEBT Playing by the Rules
Watkins, Alfred J.
U.S. banks got another last minute reprieve in June, when Argentina agreed to implement yet another IMF adjustment program. The program required the Argentine government to reduce its budget...
...Not only did they avoid a potential double-barrel disaster, but they received nearly $1 billion for their troubles...
...They had relatively little money at stake, so an interruption of interest payments, or even a default, would not threaten their viability...
...It is a harbinger of bankruptcy...
...In a closely related development, President Ratil Alfonsin announced tough new anti-inflation measures, including a freeze on all wages and prices, a promise by the government to stop financing its deficit by printing money and the creation of a new currency, the austral...
...For their part, all the Argentines have to do is give the appearance of capitulating to the banks and the IMF...
...And as the Argentines are demonstrating to everyone, bank regulators, who are supposed to be preserving the integrity of the financial system, are quite willing to participate in this charade...
...After the IMF agreement was announced and President Alfonsin had announced the new round of austerity measures, the regulators issued a cryptic ruling requiring banks to "utilize conservative accounting treatment of interest payments received from Argentina...
...banks with the largest exposure to Argentina, special reserves would have a major impact on both bank profits and the value of stockholders' equity...
...For the big multinational banks with the greatest amount at stake, a temporary delay in implementing the refinancing agreement would not be fatal...
...A country with a weak economy overrun by inflation is a country that cannot defend its national interests and make its just demands for a more equitable international order respected," he said...
...In fact, in a nationally televised speech 5 REPORT ON THE AMERICAS spelling out the details of the government's new economic policies, Economics Minister Juan V. Sourrouille alluded to the fact that curbing inflation is a prerequisite for making new demands on the banks...
...Consequently, a 10% special reserve would reduce reported profits and the value of stockholders' equity at each bank by at least $100 million...
...Successful Week for Banks Argentina's latest IMF agreement spared the big banks, at least for the moment...
...The Alfonsin government has been insisting that Argentina will not spend more than $4 billion of its own funds to pay interest...
...Rather than make new loans to a country that bank regulators had deemed uncreditworthy, they would just as soon write off their loans altogether...
...financial community expects that more troubles are looming just over the horizon...
...However, plans to disburse the $4.2 billion new loan and to reschedule the old loans were put on hold in February, after the IMF announced that it was suspending its agreement with Argentina...
...The immediate impetus for this latest episode in the Argentine debt drama was a regularly scheduled meeting of the Interagency Country Exposure Review Committee (ICERC...
...But at least for the next few months, Argentina stands to make a tidy profit if it succeeds in convincing everyone that it has reformed and can now be trusted to play by the financial community's rules...
...98-181), passed in conjunction with the IMF quota inAlfred J. Watkins, a Washington economist, was a co-author of the MarchlApril Report on the Americas, "Debt-Latin America Hangs in the Balance...
...This would reduce their profits even more than establishing a special reserve...
...Under no circumstances did the government announce these tough measures simply so the country would be in a better financial position to pay interest...
...Last December, a negotiating committee representing all 320 banks with loans to Argentina announced plans to lend an additional $4.2 billion so Argentina would have enough cash to continue paying interest on old loans...
...While bank officials are still trying to devine precisely what this means, one interpretation is that banks will no longer be allowed to count interest payments from Argentina as profits...
...JULY/AUGUST 1985 Consortium Offers New Money Lower profits might be the least of the problems caused by a value impaired ruling...
...In addition to this so-called bridge loan, the banks received two additional interest payments totalling $570 million, after Argentina announced it would use some of its own cash to further reduce its interest arrears...
...According to a June report in The American Banker, a financial daily, Manufacturers Hanover Trust Company, Citicorp, Chase Manhattan and Morgan Guaranty Trust Company have each lent approximately $1 billion to Argentina...
...The program required the Argentine government to reduce its budget deficit from 10% of GDP to 3% of GDP by year end and to cut the monthly inflation rate from 30% in May to 12% by December...
...And they would leave the banks, which could not afford to walk away from their Argentine loans without imperiling their own solvency, with only two options...
...Argentina was guilty on both counts...
...Seen from this perspective, even Alfonsin's strict anti-inflationary measures are not an indication that Argentina has suddenly decided to play by the banks' rules...
...Symptoms of a "protracted inability" include a failure to make full interest payments or to adhere to an IMF adjustment program...
...All told, it seemed to be a successful week for the banks...
...At the same time that Argentina was signing its agreement with the IMF, Moody's, a private credit rating agency that assesses the risk associated with various investments, announced that it was lowering its credit rating of Manufacturers Hanover Trust Company, the bank with the largest exposure in Argentina...
...Barring that, the big banks could let the small banks scuttle the rescheduling agreement and precipitate a default...
...It would also mean that a $14 billion refinancing package, announced only last December, might unravel, leaving banks little choice but to declare Argentina in default...
...But if their profits were going to suffer anyway, many officers at small banks believed that declaring a default might be better than trying to justify to their boards of directors and stockholders endless rounds of new loans...
...Under the terms of the International Lending and Supervision Act of 1983 (Title IX, P.L...
...And to add luster to the banks' apparent victory, the United States and several other governments agreed to lend Argentina $470 million so it could make an immediate installment on overdue interest payments...
...Either way, the big banks were facing major losses...
...If the small banks refused to participate in the rescheduling agreement, they would leave Argentina without enough cash either to continue paying interest or to repay old loans that were rapidly coming due...
...Many of these smaller banks had been reluctant participants from the beginning...
...In its announcement, Moody's declared, "Loans to Argentina have diminished further in value...
...For U.S...
...Presumably, there will be a time when a credit downgrading will be more convenient...
...As long as Argentina receives an adequate amount of new money-perhaps through a combination of IMF funds, bridge loans from creditor governments and new bank loans-interest can be paid and the appearance of bank profitability can be preserved...
...crease, banks are required to establish special reserves whenever there is "a protracted inability of public or private borrowers in a foreign country to make payments on their external indebtedness...
...bank regulators would be required to classify U.S...
...Instead they must be used to reduce the outstanding principal...
...And as long as it is in the country's interest to do so, the banks can count on compliance from Argentina...
...Thus, for the price of signing an agreement that it has repeatedly violated in the past, plus the immediate expenditure of somewhat more than $500 million, the Argentine government will receive several billion dollars from the banks and several hundred million dollars more from the IMF...
...But the big banks were fearful that many small banks in the rescheduling syndicate would use the ICERC ruling as an excuse to scuttle the agreement...
...As Argentine officials are quick to point out, a 1000% annual inflation rate is a symptom of intolerable social disintegration...
...For banks, this would mean considerably lower profits...
...Consequently, without persuasive evidence that Argentina was mending its ways, ICERC would have little choice but to declare bank loans to Argentina "value impaired" and to require banks to establish special reserves...
...ICERC members--officials from the Federal Reserve Board, the Comptroller of the Currency and the Federal Deposit Insurance Corporation-meet several times a year to review the status of commercial bank loans to developing nations...
...Symptoms of a "protracted inability" include a failure to make payments on their external indebtedness...
...Without an IMF agreement, the financial equivalent of a "Good Housekeeping Seal of Approval," U.S...
...Curbing inflation, they explain, would be necessary even if the debt crisis did not exist...
...Bank regulators are becoming more negative too, even though they declined to require special reserves...
...bank loans to Argentina as "value impaired...
...Normally, this accounting treatment is reserved for payments from domestic debtors encountering severe repayment difficulties...
...The profit comes from the fact that the rescheduling agreement, which provides Argentina with $4.2 billion of fresh loans, stipulates that Argentina will receive almost $2 billion in the first disbursement, scheduled for later this year...
...In addition, it must write down--or reduce the value on its books-of its loan to that country by the amount of the special reserve...
...Argentina's power comes from a basic fact that no IMF agreement can alter: its interest payments are running at a $6 billion annual rate while its trade surplus is only $4 billion...
...Once special reserves are mandated, each bank must deduct from its income-and place into the special reserve-an amount equal to at least 10% of its loans to that country...
...The big banks could buy Argentine loans from the small banks, knowing 7full well that the small banks would probably demand 100 cents on the dollar for a loan that the regulators would immediately value at only 90 cents on the dollar...
...An official later explained that Moody's is "more negative on Argentina than it has been in the past...
...Playing by the Banks' Rules Approximately one month before Argentina signed its agreement with the IMF, an Argentine official with close ties to the ongoing negotiations told me, "We'll sign with the IMF in June because it's not convenient for us to have our credit rating downgraded at this time...
...As of June 10, the date of the ICERC meeting, Argentina, with an overdue interest bill totalling approximately $1.2 billion, was seven months behind on its interest payments...
...Also, the IMF announced in mid-February that Argentina had fallen out of compliance with an adjustment program it had signed only last September...
...However, despite the appearance of total victory for the banks and total capitulation by the Argentines, these events are just one more example of how little leverage the banks really have, and how easily the Argentine government can orchestrate events to suit its own needs...
...The committee also agreed to reschedule-to postpone for up to 12 years-principal payments that were orginally due in 1984 and 1985...
...Manufacturer Hanover's considerable exposure to Argentina will depress future profitability and limit capital adequacy to levels that may be inconsistent with current ratings...
...Negative on Argentina" Apparently, even the U.S...
...so either someone gives Argentina $2 billion to pay interest, or the banks forego income totalling $2 billion...
Vol. 19 • July 1985 • No. 4
