Posted on 26-4-2002

When Money Doesn't Talk Anymore
From www.debtchannel.org

President Eduardo Duhalde's government appeared to be unraveling Tuesday
after his economy minister resigned and the Argentine Senate refused for a
second day to consider highly unpopular legislation that would convert
billions of dollars in bank deposits into low-interest, long-term bonds.
The departing minister, Jorge Remes Lenicov, was one of the reluctant
architects of the bond proposal, which is intended to brake the worst
economic crisis in the country's modern history. He also faced fierce
criticism within the governing Peronist party since returning empty-handed
from negotiations in Washington over the weekend with the IMF.

The abrupt departure of Remes Lenicov, the president's chief economic
adviser, who worked closely with Duhalde for many years, raised doubts
about the future of Argentina's efforts to obtain an emergency rescue
package from the Fund, the piece says. Remes Lenicov was the chief
negotiator with the fund and other creditors, and the only senior member of
the government to consistently argue that Argentina could not resolve its
crisis without IMF aid. The Wall Street Journal also reports on Lenicov's
resignation.

Savers who had gathered outside the Congress in Buenos Aires celebrated the
apparent end of the emergency measure [the bond proposal], which had been
taken to head off a total collapse of the financial system. It is now
unclear what will happen to the banks, which have been pushed to the brink
of failure by a string of court injunctions granting savers access to their
frozen deposits.

On Monday, President Eduardo Duhalde had put the problem in Congress's lap,
saying that the future of the banks would remain "in God's hands" if the
law was not passed. He added that legislators were free to elect a new
president if they were unhappy with his performance. Congress appointed
Duhalde as interim president in January after nationwide rioting toppled
two governments in December. The Washington Post (p. A20) says the
resignations, along with renewed large-scale protests against the
government, raised concern that Duhalde might be forced to call early
elections. Duhalde, who in January was named Argentina's fifth leader in
two weeks after severe social unrest, convened an emergency meeting at the
presidential residence, seeking support in his ruling Peronist party as
well as among opposition and union leaders. Meanwhile, Dow Jones reports
that in addition to a new economy minister, President Eduardo Duhalde plans
to overhaul his cabinet and make those nominations public Wednesday, said
Anibal Fernandez, his top aide, during two different television interviews
late Tuesday. "Tomorrow, all of this should be resolved," said Fernandez,
on the Todo Noticias network's "Dos Voces" program. At the same time,
Fernandez denied widespread speculation that Duhalde plans to break off
talks with the IMF in order to solidify his populist political standing
within the Peronist Partido Justicialista.

Doubt killing `global financial reform'

A leading emerging market policymaker on Tuesday cast doubt on the radical
plan to reform the global financial system launched last weekend by the
world's rich countries, the Financial Times reports (p. 4). Finance
ministers from the Group of Seven industrialized countries on Saturday
launched an action plan to persuade emerging market governments to add
special clauses to all their bonds to make it easier to deal with creditors
if they defaulted. They also gave the go-ahead for research on a parallel
IMF plan to institute a judicial procedure for bankrupt governments.

But Guillermo Ortiz Martinez, governor of the Mexican central bank, told
the Institute of International Finance (IIF) conference in New York that
such plans were unlikely to gain enthusiastic backing from emerging
markets. Countries remained suspicious of the IMF plan, and were concerned
that adding the "collective action" clauses to their bonds - a course of
action championed by the US Treasury and backed by the IIF - would increase
their borrowing costs. "If we decided to do a small emission of debt with
collective action clauses, we could probably do it without the spread
rising too much," Ortiz said. "But this is only at the margin. It is hard
to believe we could do a lot without pushing the cost higher."

Commenting on the G7 proposal, Martin Wolf writes in the FT (p. 12) that
never before have the countries with a preponderant voice in the
international financial system so clearly endorsed the case for a more
efficient, expeditious and orderly procedure for dealing with sovereign
bankruptcies. This reflects their deepening dissatisfaction: crises have
been too frequent; the procedures used to handle them have been too ad hoc;
what has been expected of private sector creditors has been too
ill-defined; and, in consequence, debtors and creditors have found it too
easy to "game" the official sector into lending too much.

The objections to this proposal are unpersuasive. They are either a matter
of timing, or incorrect, or apply equally to any less formal alternative.
Nobody would now envisage domestic lending without a formal bankruptcy
procedure. The same logic applies to lending to sovereigns. The time to
recognize this fact is now, Wolf says. Indeed, it is decades, perhaps even
centuries, overdue.

Also commenting, the Wall Street Journal Europe (p. 10) says that until
recently George W. Bush's Treasury Department has pushed for the market
solution. But last week US Treasury Secretary Paul O'Neill gave ground and
also waved ahead the IMF's bankruptcy project. Perhaps O'Neill is hoping
that fear of this new IMF power will spook both developing countries and
private lenders into going ahead with the market-friendly collective action
clauses, the editorial says. But it's risky business to give the IMF any
bureaucratic running room, especially with all of that new Washington
office space in the works.

We've been around long enough to recall when the IMF was a small gang of
experts whose duty was to preserve a stable currency system. But that task
ended with the collapse of Bretton Woods in 1971, and ever since the Fund
has been a bureaucracy in search of new missions. The bankruptcy court is
only the latest, and among the worst, the editorial says.