Argentina's creditors would do well to remember that the country's growth is the foremost priority, writes Hisham El-Naggar from Buenos Aires Argentina's creditors would do well to remember that the country's growth is the foremost priority, writes Hisham El-Naggar from Buenos Aires Argentina is back in the news. It is not that the world has suddenly started caring about the debt-ridden country which has staged a remarkable economic recovery from its near- collapse following default and devaluation. What matters more to the world -- especially the financial part thereof -- is that Argentina is now negotiating with creditors who had been left stranded with non-performing Argentine debt. In December 2001, Argentina suspended payments on roughly $80 billion worth of bonds, the largest default in history. Pundits in the know predicted that the country would pay a terrible price, as "no one would put a penny" in that untrustworthy den of corruption. Pity the corruption did not catch their eye before Argentina defaulted; the 1990s, when money poured in from outside, were easily the most corruption-ridden years in Argentine history. Now, with a rather popular president -- Nestor Kirchner -- who has presided over an utterly unexpected recovery, Argentina has confounded those who predicted, indeed reported, its demise. Kirchner's popularity stems in part from his having stood up to those who plundered the country in the 1990s, including those who had "advised" the now disappointed bondholders, namely international banks who pocketed their cut in advance. For many months it looked like Kirchner was in no hurry to negotiate with creditors. Now that he is under pressure from the IMF and the world's wealthiest nations, he has begun to talk to creditors in earnest and has something to show for his enduring stubbornness: Argentina has grown substantially. Evidence of growth is everywhere. Many shops in downtown Buenos Aires which had long been boarded up have reopened, retailers seeking outlets are put on waiting lists, and unemployment has fallen from 20 per cent before default to 14 per cent, not yet tame but low enough for the wanted section in the papers to swell considerably. Inflation, a recurrent scourge in the nation's history, is well below 5 per cent even as salaries have been recovering at a faster rate. Tourists have been flocking to the now competitively priced country, despite rumors of occasional violence. Oh, and the budget surplus, which is what matters most to the IMF as it determines the country's ability to repay its debt, has exceeded expectations. To be sure, not all is sugar and honey. Fourteen per cent unemployment means that poverty is not going to be eliminated overnight. Growth has decelerated a bit -- though still expected to be high this year and probably the next -- as lack of credit has made it difficult to invest, even if business opportunities abound. Above all, the debt morass hangs over the country's neck like a sword of Damocles, which explains why the government finally agreed to get talks going with creditors. What exactly is Argentina offering its creditors? A bit more than it had at an IMF meeting in Dubai last year. Then bondholders were offered 25 cents on the dollar, not in cash but in the form of long-term bonds, which suggests a further discount, and accumulated interest that had gone unpaid was simply not mentioned. Now the government is offering to capitalise that interest and apply the 75 per cent debt cancellation to market value rather than nominal value, so that 75 per cent would be the total discount that creditors would have to acquiesce. The negotiations were expected to prove messy. Bondholders are divided into a myriad of groups whose claims to represent creditors are not altogether unquestionable. These groups include the redoubtable "vulture funds", namely investors who bought Argentine bonds at a steep discount after default occurred, and who threaten to sue if not paid in full -- which would imply an astronomical profit. Many of the creditor groups reacted angrily to the new Argentine offer. Some hinted that an up-front cash payment to creditors who have not been paid anything since 2001 would help matters. Others are threatening to take Argentina to court. "So sue me," the government seems to be saying. Attempts to sue the Argentine government overseas have so far yielded nothing. The reason is simple: the Argentine state now owns very few assets abroad which can be seized, courtesy of the wide-ranging privatisation drive fondly praised by the IMF. Like it or not, recovering anything at all from defaulted Argentine debt depends on the Argentine government's goodwill. So what is the moral in this parable of high- powered finance? First, if there is anybody who is vulnerable to being sued and risks losing money, it is the banks which recommended Argentine debt to depositors seeking advice when they should have known better. This is especially true in the case of Italian, German and Japanese bondholders. Second, stereotypes are not much help in interpreting the motives of either side. It is not true that all bondholders are bloodsuckers bent on making a killing; "vulture funds" hold a small percentage of Argentine debt, much of which is in the hands of small investors who were ill-advised. Nor is it true that the Argentine government is negotiating in bad faith, as it is aware that the weapons it has been threatened with are ineffective. The government does want to settle with its creditors, but it thinks a steep discount is the only way to ensure that growth continues. There's the rub: if growth is smothered because of an unrealistic repayment schedule, another default is inevitable. It is only natural that creditors should have a stake in the country's prosperity, more so if one considers that the government's new offer includes a coupon that is tied to growth. Perhaps it is time for the country's creditors to pray earnestly for the continued good health of the country which pundits prematurely sentenced to death.
