Argentina crisis threat to banks

by Brett Arends, Daily Mail

BRITISH banks are not crying for Argentina just yet - but they are keeping their hankies to hand as it plunges further into financial crisis.

Led by giants HSBC, Lloyds and Barclays, they have £5bn loans at risk if Argentina defaults on its debt. Spanish and American rivals hold a much greater share of the country's £100bn in overseas borrowings.

President Fernando de la Rua called default fears 'a momentary problem' and vowed to cut spending 'month by month' to eliminate the government's hefty budget deficit this year. Taxes will also be raised.

Economics Minister Domingo Cavallo promised the currency will not be devalued and says savers' money is not at risk.

Investors are sceptical. The Merval, the Buenos Aires stock market index, crashed more than 10% in early trading on Thursday, taking it to barely half the level it was six months ago.

Bank withdrawals mounted alarmingly. Interest rates on some government debt soared to 33%. Politicians are digging in against cuts or tax rises while the economy stagnates. Unemployment is already near 15%.

World Bank chief economist Guillermo Perry said: 'We cannot totally rule out a more serious problem.' Many are calling for a new deal to write off some debts, comparable to the Brady financial restructuring plan ten years ago.

While the president insisted 'the bases of our economy are solid', Argentina's main export is IOUs. External debt accounts for 54% of gross domestic product. It must pay £7bn interest over the next six months.

The panic hammered emerging markets from South Africa to eastern Europe. Analysts believe speculators are briefly taking advantage to raid currencies and bond markets. They played down fears that more serious economic contagion will spread.

David Lubin, emerging market economist at HSBC, said: 'It is unlikely we will see a rerun of the 1997-8 crisis.'

http://www.thisislondon.co.uk/dynamic/news/business_story.html?in_review_id=415158&in_review_text_id=364251

-- Martin Thompson (mthom1927@aol.com), July 13, 2001

Answers

Headline: Argentina minister appeals for calm

Source: BBC News, 13 July 2001

URL: http://news.bbc.co.uk/low/english/business/newsid_1436000/1436129.stm

Argentine Economy Minister Domingo Cavallo has appealed for calm following a sharp drop in the value of Argentine stocks in the financial markets and fears that the country would default on its debt payments.

Argentina shares slid by more than 13% shortly after the start of trading on Thursday, as the nation's financial crisis escalates, although a late rally left the Merval down just over 8% on the day.

Speaking after a surprise cabinet meeting called by President Fernando de la Rua, Mr Cavallo said his austerity plan was the only alternative to "returning to an absolutely disorganised, unjust economy".

Meanwhile the United States and the International Monetary Fund have indicated they had no plans to grant additional funds to help South America's third largest economy.

The Merval Index of leading shares fell to its lowest level since March 1995 when the government's latest package of economic measures was not well received by the markets.

And the gloomy mood was compounded when the credit agency Standard and Poor's cut the country's credit rating to 'B' minus.

Despite the austerity plan, fears are still growing that three years of economic stagnation could leave the country without the funds to pay its $128bn debt.

'No devaluation'

The debt mountain is equal to almost half of the country's gross domestic product.

Mr Cavallo announced on Wednesday that the government intended to reduce all government spending, including pension payments and salaries.

In an address on national television, Mr Cavallo said: "There is only one path to resolve our problems - spend only what we collect in taxes."

Mr Cavallo also tried to soothe the currency markets, saying "There won't be devaluations... we will defend at all costs the stability of the peso and the financial system."

But the markets remained unconvinced, and opposition parties dismissed the planned changes, with one deputy branding the reforms as "totally recessive".

And members of the ruling Alliance issued a statement to the government urging it to seek broad agreement with other political forces to quell the economic crisis.

Knock-on effect

The International Monetary Fund (IMF) warned on Thursday of the knock- on effect on growth prospects for emerging markets around the world. "Market participants widely believe that a crisis in Argentina would lead to much reduced capital flows to emerging markets and thereby would reduce their growth prospects," the IMF said in its 2001 International Capital Markets report.

Investors worldwide, remembering how the so-called Asian crisis swept through markets in the late 1990s, have already been scrutinising the plight of emerging economies in the current period of global economic slowdown.

The fallout from Argentina's financial crisis has already spread through the Americas and across the Atlantic.

-- Andre Weltman (aweltman@state.pa.us), July 13, 2001.

[And here's one more -- I thought the explanation of some of the underlying mechanisms was useful: ]

Headline: Argentina's Austerity Unnerves Neighbors; Capital Flow to Emerging Markets Could Be in Danger, IMF Warns

Source: International Herald Tribune, 13 July 2001

URL: http://www.iht.com/articles/25999.html Argentina's markets teetered Thursday on the verge of collapse after its latest effort to put its economy in order failed to win many supporters inside the country or out. The International Monetary Fund warned that the crisis in Buenos Aires would make it difficult for other countries to raise needed cash.

"Market participants widely believe that a crisis in Argentina would lead to much-reduced capital flows to emerging markets and thereby would reduce their growth prospects," the Fund said in an annual report.

The Buenos Aires stock market plunged and yields on government bonds rose to levels suggesting investors believed default was imminent. The contagion was felt on other emerging-market debt, but stock exchanges were insulated by a powerful rally on Wall Street.

At midday, the Argentine floating-rate bond due in 2005 was yielding about 33 percent, up from 26 percent on Wednesday, as investors fled the market. The yield was below 13 percent early in June. On Tuesday, the government had to pay 14 percent to sell three-month debt, and most of that was purchased by locals banks and bond dealers, apparently reacting to government pressure to take the paper.

The Merval index, which measures Argentine stocks, fell more than 6 percent in late trading, bringing its loss for 2001 to nearly 25 percent. While that did not have much effect on other stock markets, bond prices slumped in other developing countries. Brazil, Argentina's biggest trading partner, saw the yield on its C bond rise to 15.75 percent from 14.91 percent.

Late Wednesday, President Fernando de la Rua ordered spending cuts that would reduce practically all government outlays, including salaries and pensions.

With a mountainous debt load of $130 billion after three years of recession, the country is losing the ability to borrow more money, so it cannot afford to run a budget deficit. The gap for the second half of the year had been projected to run about $1.6 billion, so the reductions would have to equal that.

Even if Argentina's proposed spending cuts are enacted, the economic consultancy IDEAglobal said foreign assistance would be needed in excess of the $19.5 billion pledged in December by the Fund, the World Bank and Spain.

But this aid may not be forthcoming. Although President George W. Bush indicated in April that the United States might be willing to provide assistance to Argentina, lately there has been no sign that America would step in. The United States holds significant influence over the World Bank and the Fund, and they also have not given any indications that they would commit new funds.

John Taylor, the U.S. Treasury undersecretary for international affairs, said this week that he believed the troubles in emerging markets were attributable mainly to factors unique to the countries involved. Officials of the Turkish government were meeting with the IMF late Thursday to restart the flow of loans. Turkey's markets, which have fallen in tandem with Argentina's of late, rallied Thursday.

Part of Argentina's situation is unique to that country, so it does not present the threat of a global crisis. The country's decision to peg its peso to the dollar has helped slow economic growth, for example, and it is also suffering from weak prices for two of its primary agricultural exports, wheat and soy. The country's problems have been compounded by the slowing global economy, which affects many emerging-market nations, but it is more vulnerable because it was in recession for two years while most of the rest of the world was growing.

One reason for the widespread decline Thursday was that, as investors decided to reduce their holdings of mutual funds invested in emerging- market debt, these vehicles had to sell bonds from other countries to meet their redemptions. The funds often sell the most widely traded issues at such times, including the Brazilian issue.

Investors opted to put money in the haven of U.S. Treasury bonds, where yields fell as funds came flooding in. The 10-year bond fell to a yield of 5.25 percent from 5.29 percent on Wednesday.

Standard Poor's reduced its rating on Argentina's long-term bonds to B-minus from B. The B category is for low-grade bonds whose issuers would have trouble paying their loans in tough financial conditions. The rating agency cited "the growing strain on the cohesion of the governing coalition" and the risk that it may impede efforts by Economy Minister Domingo Cavallo to implement "draconian" measures to balance the budget.

Mr. Cavallo said Argentina's provincial governments should eliminate their deficits. Support for his efforts, which also include mechanisms to reduce tax evasion, did not seem to be forthcoming from politicians and labor leaders.

Standard Poor's suggested the government might collapse as a result of the spending cuts, which would total $4.25 billion for all of next year, leading to a default: "With the economy unlikely to pick up before next year at the earliest, the spending cuts necessary to balance the budget will severely test the government's resolve - possibly to the breaking point. An unraveling of the ruling coalition in these circumstances would make debt restructuring hard to avoid."

Argentina finds itself in a box. Its currency is linked to the dollar, which has been rising for most of the past five years. That makes it hard for its exporters, putting pressure on companies that have international competition. Abandoning the link probably would not help much, since exports account for only about 10 percent of the economy and, according to IDEAglobal, 70 percent of private-sector liabilities are dollar-denominated. A devaluation of the peso "would trigger large-scale multiple defaults and a contraction of economic activity."

A bond default also would be problematic because many of Argentina's bonds are held by domestic entities such as banks and pension funds. Banks would become insolvent "and be forced to freeze private individual deposits, which would be disastrous for the payments system," IDEAglobal predicted, while overseas trade credits would be ended, "which would translate into a stand-still in domestic commercial activity." Overnight loans among Argentine banks were carrying interest rates of 200 percent or more on Thursday.

-- Andre Weltman (aweltman@state.pa.us), July 13, 2001.

Argentina Leaves Investors In Despair

Political and union leaders have thwarted the Argentine government in the government's plan to reduce spending in order to avoid a default on $130 billion worth of debt. (7/13/2001)

http://www.marketsandexchanges.com/index.asp?news=18356

Political and Union leaders withheld support for the government's plan to reduce spending, forcing the government to pay out a record 14 percent to domestic banks on Tuesday, in order to refinance debt due this week. Government officials said they would refinance around $4.8 billion in Treasury bills coming due this year with debt of longer maturities, forcing local banks that had bought the Treasury bills and domestic pension funds to assume longer-term risk, reported Bloomberg.

This week's spending prompted a selling off of Argentinean currency, and J.P Morgan estimated that investors holding the dollar- denominated Argentine bonds lost $16 billion today.

The strain being produced by the coalition government has been the source of frustration for many investors. "If you're running an emerging markets fund right now, your clients are losing money," Jonathan Binder, who manages about $400 million for Standard Asset Management in Miami told Bloomberg reporters. "I'm definitely frustrated with this country. These politicians have their heads in the sand."

Standard and Poor's also downgraded the credit rating for Argentina from "B" to "-B".

-- Martin Thompson (mthom1927@aol.com), July 13, 2001.