News Center

Don't only approach the Paris Club
Ambito Financiero
August 27, 2008

According to a report put together by economist Guillermo Mondino, charged with Latin American analysis at Lehman Brothers, an arrangement with the Paris Club would not solve Argentina's financial problems: the commercial creditors that are underwater from this organizations would be ready to lend, but they would do it for financing foreign trade or long-term infrastructure projects, and not for facing debt payments coming due.

While welcome, if it's treated as an isolated initiative on the part of the government it will help little to resolve the larger financial pressures that Argentina faces," said the report that Lehman distributed to its clients yesterday. It was soon after Ambito Financiero reported on the intention of the government to retake an agreement with the creditor countries to refinance the debt in default.

The Mondino study put forth more about the characteristics that an arrangement could have:

A traditional agreement with the Paris Club requires that the debtor pay in a lump sum all the penalties for the debt in default and refinance the rest.

In the case of Argentina, that interest and penalties add up to US$4.5 billion. As such, the country has to find these funds. Traditionally, this money could be (at least in part) provided by the IMF. But the intention of Argentina is to minimize the role of the Fund in the whole operation. As such, the money has to come from its own sources.

Probably the Paris Club countries are insisting on using part of the US$47 billion in reserves that Argentina has.

This generates two problems from the point of view of the markets. If the government uses reserves, the bondholders that didn't enter the swap (the holdouts) will go to court, alleging that the reserves are commercial assets and therefore can be embargoed.

Also the government could turn to those resources through the figure of transitory advances. But that would mean returning to a lender of last resort, which would generate more doubts in the markets.

Whatever arrangement with the Paris Club requires a long negotiation, and many preliminary meetings in Paris. And then individual negotiations with each creditor nation. This process couldn't be resolved in a matter of weeks.