im not an economist. i dont have a PHD. and i dont trade currency markets. but, every once and a while i notice that the IMF keeps loaning argentina money to make payments on debt they cant service. it'd be like a bank loaning you money every month to make the mortgage payments to them even though you are broke (or worse than broke). of course, the debt just keeps growing which would be ultimately more onerous, if in fact you ever intended to reduce the principal. the lender carries the "performing" debt at the note value. when say a $10 billion payment is due, they increase your loan by $10B and then show a $10B payment being made. the loan's only performance is in the bookkeeping. in this mornings IBD, there is a small blurb that the $90+B in argentine debt of last year now has a "value" of +/-$50B due to conversion of the debt to local currency.... did the IMF and/or other debt holders quietly just eat a $40B crap sandwich? isnt this a defacto writeoff/writedown of the debt? BTW, i think the IMF just sent them a few more billion bucks in loans, which they promptly paid the IMF back in payments on the existing debt. could someone a little smarter than me, maybe a currency trader, point out how this can ever work out in the long-term?
Although I am probably not smarter than anyone here, we touched on this in my last economics class. Basically, moreorless what you said is pretty much the case. I believe what is happening is that they are trying to keep the currency from becoming totally worthless from the immense debt which they have no hope of ever repaying to anyone. So, with a slight of hand with creative book-keeping and immensely complicated currency conversions, they are able to retain some resemblance of an economy while the missing 40 billion dollars just sort of floats around in the same place all of our socks go when we can't find them. This debt juggling can only go on while there are other larger economies to keep the smaller ones from falling on their faces (US, Europe, some of Asia). However, if the big economies go, it is a domino effect.
IMF/Argentina deal: $6.78B "loan" package. $2.98B standby to cover loan payments that will be due in in first 8 months of 2003. 1-year extension on $3.8B extension of loans that WOULD have come due in first 8 months in 2003. according to IBD, this little slight of hand clears the way for Argentina to negotiate a reduction for the $51B in "private" debt. the Argentine president wants them, bondholders, to take a 70% haircut. that would take the debt down to $15 before considering anymore "standby" grants/loans. if you follow the footprints, i think this debt was $91B in greenbacks - then reduced to $51B when converted to local currency and now its just an outright crap sandwich that gonna be taken by "bagholders." after they get it down to $15B or some other palatable amount, watch for some sort of grants to take the debt out immediately.... somebody's paying for this.... then, the big news flash on CNBC that argentina has retired its debt. Hurray! only for a moment of course, as they shortly will be forced back to the IMF for more money. how long can this go on? when was the last time argentina actually made a payment that was not some sort of loan increase, extension or forgiveness? is BONO running the iMF?
just heard on the radio that poverty rate in argentina rises to 58%.... just think what it would be if they actually ever made a payment on foreign debt or god forbid actually reduce the debt. this probably increases chances of cramming down the value of existing debt. then we start all over again?
thats a good article. shows what happens when the government thinks higher taxes are always the answer.