Wednesday, June 11, 2014

The Paris Club, Vulture Funds and global debt restructuring

Argentina has finalized a deal with the Paris Club two weeks ago. And tomorrow, if I'm not wrong, the case against the Vulture Funds will be finally decided by the Supreme Court. On the first one, Argentina signed an agreement with the Paris Club that implies the country will pay around US$9.7 billions in the next 5 years.

There is an interesting twist in the agreement with the Paris Club. The agreement was reached without accepting an IMF program, which have traditionally been part of all such negotiations. The Club and the IMF used to be joined at the hip. Two Paris Club chairmen, Jacques de Larosière and Michel Camdessus, became later managing directors of the IMF. So in a sense, the idea was that austerity at home was essential for repayment abroad. Here it is important to note a traditional confusion in the conventional view about the role of austerity.

Note that fiscal austerity can only have an indirect impact on repayment of a debt in foreign currency. You don't need more revenue in pesos (from taxes) to pay interest on foreign denominated bonds, but external revenue from exports, or capital inflows, or accumulated reserves. So austerity helps if it leads to reduced demand for imported goods and services, and more dollars left for repayment.

In all fairness, not having an IMF program is good, but it is NOT a sufficient condition to guarantee that austerity measures will be discarded altogether. I had discussed this before here, but it is far from clear that the Argentinean government will continue to promote a fiscal strategy associated with expansion, which more or less characterized the 2003-2008 boom, and the fast recovery from the 2009 crisis. And while the agreement is also good from the point of view of closing the mess caused by the 2002 default, the problem will not be completely resolved until the Vulture Fund issue is sorted out.

The dangers associated with the Supreme Court's decision are difficult to exaggerate. The Supreme Court may lead Argentina to a new default, not so much because the country can't pay, but because it will not pay (correctly so, in my view). At any rate, worth remembering that creditors have a Club and negotiate from a position of strength, while debtors negotiate one at a time, without the force of collective power. Perhaps the time has come for a Club of Debtors; the Club of Athens might be an appropriate name.

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Trade and Finance

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