What Life after Default? Sovereign Debt Restructuring and Credit Access in Argentina

313 Pages·2013·13.5 MB·English

What Life after Default?
Sovereign Debt Restructuring and Credit Access in Argentina
By Giselle Datz
A dissertation submitted to the
Graduate School - Newark
Rutgers, The State University of New Jersey
In partial fulfillment of the requirement for the degree of
Doctor of Philosophy
Graduate Program in Global Affairs
Written under the Direction of
Professor Robert Kaufman
&
Approved by
Robert Kaufman
Philip Cemy
Newark, New Jersey
May 2007
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UMI Number: 3293894
Copyright 2007 by
Datz, Giselle
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2007
Giselle Datz
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ABSTRACT
What Life After Default? Debt Restructuring and Credit Access in Argentina
By Giselle Datz
Thesis director: Professor Robert Kaufman
Although a recurrent phenomenon, sovereign debt restructurings following
defaults on debt obligations do not engender today the exact same dynamics they did in
the past. On the one hand, prevailing economic understandings of the implications of
default have focused on reputational models, which have overestimated the costs of
default in terms of access to new credit. On the other hand, debtors’ restructuring
strategies have been underestimated in the face of anticipated constraints on developing
countries’ policy autonomy believed to flow from financial globalization. Indeed, debt
restructuring processes in the 1990s and early 2000s have involved considerable
creditors’ participation despite debt discounts, and have been followed by economic
growth. By focusing on the latest Argentine debt restructuring (the largest and most
complex in history to date), I find that sovereign debt repayment is much less contingent
on reputations, as economic theory7 would have it, and much more linked to the short­
term nature of financial incentives in the bond industry7 and to international lending
cycles, which are the most crucial determinants of credit (re)access by defaulting
countries. A critical implication is that, given these determinants, governments have more
room to maneuver in taking contentious policy stances (such as stringent debt
restructuring deals) than the globalization literature has so far indicated. Also, debt
restructurings are not necessarily zero-sum games. Rather, they reveal constraints and
opportunities for both the public and private agents involved.
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ACKNOWLEDGEMENTS
I thank the Graduate School at Rutgers-Newark and Unisys for their financial
support, as well as Richard Langhorne and Yale Ferguson for their kind encouragement
through the years at the Division of Global Affairs (DGA). I am deeply indebted to
Robert Kaufman from whose analyses, critique, and own work I learned a great deal. In
addition, I wish to thank Phil Cerny for his review of my work and encouragement during
its many stages. I am also grateful to Anna Gelpern whose support was crucial especially
in the empirical phase of this project; her expert insight was invaluable. It was my good
fortunate to work with these generous scholars at Rutgers in Newark and New
Brunswick.
Saskia Sassen has been a reference for originality and encouragement. I surrender
to the impossibility of ever thanking her enough for all her support throughout the years.
Yet, I shall tty always.
At Rutgers- New Brunswick, Beth Leech was kind to offer her guidance with
some of the bureaucratic procedures involving fieldwork research. I am gratefiil for her
help. At DGA, I thank Desiree Gordon who was helpful and thoughtful every step of the
way.
I also wish to thank several peers in academia, whose friendship I treasure
immensely: Anne Bartlett, Kate Bedford, Renee Buhr, Kati Dancsi, Helen Delfeld,
Stacey Hunt, Amel Mili, Nichole Shippen, and Louise Stanton.
As fieldwork was concerned, I am particularly indebted to Noemi LaGreca and
Federico Molina. Their support was a special gift I found in Washington, D C., shrinking
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the world to make Buenos Aires closer and remarkable. Certainly, my gratitude extends
to all of those who accepted to be interviewed for this project and who have individually,
even if anonymously, contributed immensely to this dissertation. My stay in Buenos
Aires counted on Lautaro Crovetto’s generosity. In DC, Georgina Crovetto’s friendship
was a relished constant during many adventures. I am lucky to count on it.
I am also grateful to Mark Friedenthal who made the ride towards the very end of
this project brighter.
Finally, as has always been the case, my parents and sister’s unconditional
support provided unfading inspiration and encouragement. My gratitude to them more
than surpasses the scope of this work. Yet it is here partly materialized.
The week this project was being finalized a dear colleague passed away. He was a
source of support and inspiration to his students and a kind adviser to his junior
colleagues. I dedicate this work to the memory' of Professor Raja Helou.
iv
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TABLE OF CONTENTS
Chapter I: Introduction......................................................................................................I
Chapter II: The Argument................................................................................................34
Chapter III: Over a Century of Debt Crises. Historical Background and Current Trends in
Debt Restructuring Tools and Procedures.......................................................................96
Chapter TV: The Argentine Default and Debt Restructuring, 2001-2005: “The Most
Complex Case Yet”...........................................................................................................154
Chapter V: Dealing with Domestic Creditors................................................................214
Chapter VI: Conclusion....................................................................................................246
Appendix: List oflnterviewees........................................................................................254
Bibliography.....................................................................................................................256
Vita....................................................................................................................................306
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Chapter I:
Introduction
The 1990s started as a promising decade for middle-income countries, which in
their majority carried out economic reform programs following (with varying degrees of
speed and depth) the views expressed by the International Monetary Fund (IMF) and the
World Bank on the benefits of the market economy. The set of policies that became
known as the “Washington Consensus”5.viewed financial liberalization as a means
through which financial markets would correct savings and consumption imbalances
world-wide in a neat non-interventionist system. However, severe disturbances plagued
international financial markets at times of intense volatility2.
Financial crises in the 1990s adversely affected capital flows, domestic credit, and
ultimately output in places like Mexico (1994-95), Asia (1997), Russia (1998), and Brazil
(1999). More disturbingly, crises did not remain confined to their epicenter. Rather,
“contagion” effects were felt throughout countries known as “emerging markets”5 via
1 This now infamous term was coined by John Williamson in 1990. Critiques to the Washington Consensus
abound in the literature of economic reform and financial crises (see, for example, Naim 1999. Stiglitz
2003). For a review by Williamson of his intended definition of the term versus its man) interpretations
after a decade of use, see Williamson 2000.
2 Despite the wide reach of financial liberalization. Brooks (2004, p. 397) explains that developing
countries have "moved timidly toward capital account openness, often in a stop-and-go fashion”. Indeed,
when crises hit. some countries were more tempted to adopt some form of capital control, like in the cases
of Malaysia and Argentina.
4 The term "emerging market ' is said to have been coined in 1981by Antoine W. van Agtmael. an
employee of the World Bank's International Finance Corporation. Although definitions vary , emerging
markets are characterized as transitional, meaning they are in the process of moving from a closed to an
open market economy while building transparency within the system. These economies usually offer an
opportunity to investors who are looking to add some risk, and hence higher than benchmark returns, to
their portfolios. Here, my focus is on middle-ineome emerging economies, rather than poor countries,
because the emphasis is on the restructuring of defaulted bonds, not official debt or commercial bank loans.
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herd (or mimicking) behavior on the part of international investors. Concerned about
covering their losses in one country, investors drained capital from markets considered
risky even at times when economics fundamentals were well in place in the economies
being ‘‘exited”4. The external shocks these crises entailed would also put a strain in
fragile monetary' arrangements, such as the Convertibility regime in Argentina, which
pegged the peso to the dollar at a rate of one-to-one. On the way to exiting the peg an
interim president declared history’s largest default to date to a crowd of cheering
legislators in December 2001.
While the literature on policy making autonomy in the current global economy
has focused on fiscal, monetary or trade policy by analyzing how much (or how little)
room countries have to press for policy change given foreign investors’ expectations
(Maxfield 1998, Shambaugh 2004), it has neglected to tell us about state and financial
market relations when it comes to policy directly related to financial market expectations,
namely, the payment of or default on foreign debt. A prevalent view in early studies of
financial globalization was that international capital mobility rendered policy autonomy
(both fiscal and monetary) extremely constrained in developed countries (Gill and Law
Also, in the case of the highly indebted poor countries (HIPC) debt is usually an issue subject to relief
and/or eventual cancellation - not the case in this study.
1 Sometimes these moves were based on a misguided notion that all emerging economies fall at the same
time- a powerful self-fulfilling prophesy in some cases. Indeed, in the economic literature on financial
crises, "first generation models'", which explained currency crises as a product of fundamental economic
imbalances, gave room to "second generation models ' in the mid-1990s which emphasized the self
fulfilling role of investors’ expectations especially in regards to doubts about a government’s ability to
defend a fixed exchange rate system. Finally, 'third generation models" of financial crises were developed
post-Asian crisis of 1997. This crisis made it clear that first generation models concerned primarily w ith
fundamentals were not useful to explain Asian developments in which private (not public) imbalances
w ere at the core of the crisis. An important move of economic theory in this respect has been tire study of
models that stress balance sheet effects of private sector currency mismatches, which can contribute to tuns
to substitute domestic currency for solid currencies (like the dollar), causing steep devaluations which, in
turn, can lead to the loss of foreign credit access and consequently large output fall. Some studies that deal
with the innovative approach of balance sheet analysis are K ragman (1999). Pettis (2001). Allen el. al.
(2002), and Calvo et. al. (2004).
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1989, Andrews 1994). Though some patterns of divergence, state cooptation,
collaboration and competition were singled out in mostly OECD countries (Cerny 1993,
Pauly 1997, Dombrowski 1998, Porter 2001), the story told regarding developing
countries was more simplistic. It was argued that domestic ability to implement policy
that contradicted financial markets’ expectations was severely constrained in these
emerging economies (Strange 1995, Armijo 2001, Phillips 1998, Soederberg 2005) due to
the pressures imposed by the threat of capital outflows (or “exit”). Capital flight was
understood to be contingent on perceptions of sovereign risk - i.e., the likelihood that a
country’ will suspend payments of its foreign debt (Mosley 2003 ).
However, I contend that the view of a prevalent lack of policy autonomy is at
odds with the tact that sovereign defaults were anything but extinct in the 1990s, and
early 2000s. One can hardly think of a policy stance more divergent from financial
market preferences than the suspension of payments on debt (default)1’ owed to private
creditors who purchase government bonds both domestically and internationally.
Moreover, the restructuring of debt in terms that include a sharp reduction in repayment
to creditors but, nonetheless, counts on large acceptance by these same actors empirically
contradicts the view that there is no room to move on the part of debtor states when it
comes to their interactions with financial markets. This is the central puzzle from where
this analysis departs.
’ Default is defined here as the failure to make required debt payments on a timely basis or to comply with
other conditions of an obligation or agreement. Tins definition is the same used by Standard and Poor’s,
one of the most influential credit rating agencies. Since here my focus is on defaults in the 1990s and early
2000s. where credit to developing countries takes predominantly the form of international bond purchases
of sovereign debt, I use the definition taken as a benchmark for international investment decisions.
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