Argentina had been painfully slow to restructure its debts. Because it held off deciding to default for so long, the decision – when it finally came – hit the country hard.

Argentina had been painfully slow to restructure its debts. Because it held off deciding to default for so long, the decision – when it finally came – hit the country hard.

Argentina had been painfully slow to restructure its debts. Because it held off deciding to default for so long, the decision – when it finally came – hit the country hard.

Nowadays, we hear people talk about the Philippines doing an Argentina in addressing the country’s ballooning debt problem.

The debt problem of the Philippines is so bad that it has been compared to “pyramiding” where the government is borrowing money to pay its maturing debt. Facts about the country’s debt picture show that the pyramid could collapse soon. For example, the national government’s outstanding debt alone stands at P3.8 trillion by end of 2004 according to the Department of Finance. Debt servicing comprises 55 percent of the national budget.

Argentina was faced with a similar huge debt problem as what the Philippines is facing right now when it defaulted on bonds worth $81 billion in December 2001. Three years after the default, Argentina’s economy is much stronger and some 76 percent of the holders of Argentina’s bonds have agreed to surrender their claims in exchange for new bonds worth roughly 35 cents on the dollar in what is generally regarded as a successful restructuring of Argentina’s debts.

Can the Philippines do the same? A feature article in The Economist last week can give us some insights on whether the Argentine “solution” can also be adopted by the Philippines.

The magazine described Argentina’s “giant debt swap” as “epic in scale” and involved 152 varieties of paper denominated in six currencies and governed by eight jurisdictions.”

Argentina’s populist President Nestor Kirchner, according to the article, has set a new standard in the proportion of debt that he has successfully written off and in the process also achieved a cut in principal, a lengthening of maturity and a reduction in interest payments.

It is interesting to note the reaction of the international rating agencies to Argentina’s successful debt swap after it decided to default. The Economist article said: “Standard & Poor’s, a credit rating agency, has said it will upgrade Argentina to B-1 after a successful debt swap, a rating shared by Ecuador, Suriname and Lebanon.”

The return to some measure of financial and economic health did not come easy for Argentina. The article described the radical measures adopted by Argentina: “Argentina defaulted on everyone. It stopped servicing its bonds, domestic and international; it cut wages and raided pension funds; it foisted its bad IOUs on to one side of the banks’ balance sheets, and then made a grab for the deposits on the other side, putting a freeze on withdrawals. It forcibly converted dollar deposits into pesos at one exchange rate, dollar loans at another.”

Such radical measures might not be necessary yet for the Philippines, but the option of defaulting on its foreign debt is becoming to be the only choice for the Philippines. The article mentioned that “Argentina defaulted so heavily because it defaulted so late.” Quoting from a new book by Paul Blustein which recounts Argentina’s “descent into default, devaluation and destitution” the article said that at first Argentina was too reluctant to default. “Reluctant to default, Argentina has been painfully slow to restructure its debts. Its standoff with creditors has been confrontational, drawn-out and poisonous.”

Because it held off deciding to default for so long, the decision – when it finally came – hit Argentina hard. And that’s the reason they had to resort to other hard measures. The article observed, “Long before the event itself, it was clear that Argentina had to default on someone.” Is the Philippines in the same situation now? Would its recovery be quicker and be less painful if it decides to default now as Argentina was finally forced to do in 2001?

Just to put things in perspective, I asked a source who is an expert in Latin American affairs to comment on the Economist article. He wrote: “The article fails to point out that the Argentines are not yet out of the woods. They may have restructured their private debt and gotten away with murder (a cut of roughly 60 percent of the face value of the bonds it had issued compared to a 20 percent to 40 percent reduction obtained by other countries in past restructuring schemes but this is a short-term benefit.)

“The Argentines still have to deal with IMF which will decide if the private debt restructuring entitles Argentina to recover its place in the mainstream of the international financial system.

“The long-term consequences will still have to be faced, the most important of which is the judgment of the markets whether or not the country should be lent money again. The issue is confidence in the Argentine political leadership and their ability to shape and implement sound economic policies.

“The basic reforms sought by the IMF – an independent central bank, clear-cut limits on the spending of the provincial governments which have a certain degree of autonomy from the central government, the rationalization of the rates that privatized utility firms are allowed to charge (there had been a freeze for the past three years and these companies, most of which are foreign, are crying bloody murder) – have not yet been implemented by the populist President, Nestor Kirchner, for fear that such painful reforms may erode his popular base.”

The Economist article, however, pointed out in the article that the “capital markets appear to have a remarkably short memory.” It added: “Argentina has defaulted on its foreign debts five times in the past 175 years; Brazil seven times; and Venezuela nine times. A debtor can default, no more than once, unless a creditor is willing to forgive and forget. Amnesia sometimes sets in remarkably quickly. The bad loans that Argentina inherited from the debt crisis of the 1980s were written down in 1992. Just three years later, Argentina was carrying more foreign debt, both in absolute terms and relative to the size of its GDP, than it had in 1991.”

From this, it is clear that there will be life for the Philippines even if the Arroyo administration decides to take the plunge.

Alvin Capino, ABS CBN News, March 7, 2005