Roberto Lavagna has taken a tough stance with the private holders of Argentina’s defaulted bonds and with the IMF. Here, he argues for new principles for debt work-outs

The international financial system needs new concepts and instruments to deal with recurring sovereign debt crises, like the one Argentina has suffered. The security and development of emerging markets depend on it.

In 2001, after 11 years of maintaining unsustainable macroeconomic policies, Argentina experienced the largest sovereign debt default in history. However, these neoliberal policies had widespread international approval, not least from the International Monetary Fund (IMF). This serves as a useful example to make certain points:

It is not enough to have codes of conduct (such as proposed by the Institute of International Finance, a global association of financial institutions) if they are not coupled with, or do not contain, a transparency code. Many reports that would help improve the analysis are confidential and are never published, or are published after long delays, sometimes of almost a year. That has been our experience at the IMF meetings in which Argentina’s record was discussed.

No more ambiguity can be allowed with regard to the “preferred creditor” status of the IMF and of multilateral lending agencies. Argentina’s position has been to recognize expressly, even in court in New York, the preferred creditor status of these institutions. But if it is a preferred creditor, the IMF has a conflict of interest in getting involved in the dealings between debtor countries and their private creditors. We believe the Fund should not get involved in these negotiations.

Small investors should be treated more favourably than huge bondholders. It is not fair to treat unsophisticated retail investors in the same manner as large institutional investors. In the restructuring that I proposed to bondholders last autumn, I offered smaller investors a better deal. It would be useful if small investors’ right to differential and preferential treatment were clearly recognized.

The original bondholders – those who bought the debt instruments at face value – should also be preferentially treated compared with those who buy the bonds at a substantial discount after a default has occurred. This would help the development of emerging debt markets because investors would have an incentive to buy bonds when first issued. It would also help in the restructuring process.

The last three standards relate to the nature of investors and their attitude to restructuring. In many cases, the bond holders that most hinder restructuring processes are precisely those seeking extraordinary quick gains, who have (privileged) asymmetric analysis and information capacity, and who are able to influence and even put pressure on sovereign debtors. Defending the interests of these groups usually goes against the most stable, smaller investors and, accordingly, against stable market development.

Finally, the economic restructuring process should be judged on the basis of whether there is a bailout (from the IMF) or not. Argentina, even with all our problems, and in the middle of a tough recovery programme, has made net payments in excess of $9 billion. We have experienced how different it is to restructure when there are fresh funds and when, as in this case, there are no fresh funds. Applying the same standards in both cases makes no economic sense and does not help to normalize the markets. Global finances have a lot to gain if progress is made with these criteria, within the framework of two general principles. First, that good faith calls for creditors not to make promises they cannot keep. Second, restructuring programmes should be sustainable and not just escape mechanisms for creditors who have asymmetric information and power.

Roberto Lavagna
Roberto Lavagna is Argentina’s finance