Argentina & EuroZone = Banks & Speculators

The government of Argentina is trying to fix a deal with the largest bondholders, including the IMF, who own some $101 billion in debt from this poorly performing country. Bondholders have been meeting with the IMF to discuss what should happen with their investments ahead of the general election.

The IMF appears to be indicating that bondholders could lose a large share of their investments, with losses expected to be more than 50% of the nominal value of each bond! Many investors have purchased the bonds at prices that are much lower than 100% of the nominal value, but still the losses, which are called “haircuts”, a term that hides the reality of financial loss, will still be substantial.  “Scalping” would be a better word.

However, most of these private investors are hedge funds who have deliberately speculated in these bonds and they lobby hard with politicians and lawyers to avoid any haircuts and want too fix a profitable deal.

But do not feel sorry for these loan sharks… Argentina’s debt is reaching 100% of GDP because of the peso’s recent sharp falls and this weakens the government’s ability to repay the massive amount of foreign-currency debt. Something must be done, but seldom happen. Market reforms have not been successful.

Under Ms. Lagarde’s management, the IMF led a record $57 billion IMF bailout last year. This is a repeating scenario every few decades, and the IMF and Ms. Lagarde have been heavily criticised for pouring good money after bad!  

Now the IMF, under new management, is now proposing that Argentina should take a haircut. This means that the IMF must take responsibility for a failed rescue operation, and naturally the IMF does not want to be accused of using public money to bail out the private bondholders.

Some of these bondholders want a maturity extension on the debt. They also try to scare people into believing that a big haircut will shut out Argentina from the bond markets for several years. Their lobby is tough and persuasive.

In any event, Argentina will always find a way back to these markets because it is a huge resource-rich economy. The problem facing these bond investors and the IMF is that the governments, past and present, cannot be trusted to reform the corruption that thrives in so many parts of the country. Such corruption and its accompanying volatility create opportunities to make a lot of money for a few. One can always suspect that the big international banks will always keep their offices in such countries and that they will continue to support the hedge funds in many different ways, while also benefiting from a close relationship with the IMF. 

Now back to Europe…

Ms. Lagarde has been appointed to head up the European Central Bank. Greece, Italy, Spain, Germany and France all have some weak banks, and the first three counties in this list also have governments that are not running balanced budgets. The European Central Banks is already the investor in some 30% of all of the EuroZone government debt, some €2.6 trillion, or €7000 for every person in the Eurozone. Even though they do not admit it the European Central Bank is actually financing all of the EuroZone governments, including Finland, and is the single largest investor in our governments’ debt!

Given her recent track record at the IMF, one cannot hold out much hope that she will be able to force through the necessary reforms needed to clean up the banks and the governments’ excessive spending.

Furthermore, there is no evidence that negative interest rates or near-to-zero interest rates are useful for inducing investments. The whole policy is just a support for home owners with large housing loans and stock exchange companies are using this cheap debt for share buy-backs – another action that has no intrinsic economic value, other than increasing share prices that may enhance the value of senior management share option schemes.

In order to help big banks “earn a decent return” in this low interest rate environment, the European Central Bank has been lending cheap money to banks – another unjustified support for one particular sector of weak economies.

Investments in new plants and equipment are at very low levels in Europe and there are no sign that this will pick up in the near future – so the proclaimed benefits low interest rates are empty slogans.  

The big international banks also have a very close relationship with he European Central Bank. One can be quite sure that this will continue under the guidance of Ms. Lagarde.

Site Footer