Or, why is that when we hear that Thursday’s euro leaders summit (and the ECB) will allow selective default in a Greek bond swap and buyback — we get taken back to Appendices 7 and 8 of the IMF’s famed postmortem on the Argentine disaster?
Give ‘em a read.
To quote the IMF back then (pp. 90-94):
As stated in the text, an important lesson of the Argentine crisis is that market-based and voluntary financial engineering operations, such as debt swaps transacted at current market yields, do not work during a crisis. This follows from the voluntary or market-based nature of such operations, which implies that they are by definition NPV-neutral. But interest rates are typically higher during crisis, and any NPV-preserving transformation of cash flows made at higher rates would mean a much higher debt-service burden calculated at more normal rates and serves to worsen debt sustainability.
Voluntary debt swaps (and debt buybacks) done during a crisis can be likened to the case of an individual who, unable to service mortgage undertaken when interest rates were low, decides to refinance it at a much higher interest rate in exchange for temporary relief...
They were talking about Argentina’s first debt swap, in June 2001. Only the second, in November, triggered ‘selective default’ ratings.
Plenty more in the report about the failure of credit enhancements and “precautionary” credit lines for Argentina as well if you’re up to wading through.
Or, keep watching the news wires on Greece. Same thing!
Related link:
All going to plan. Argentina’s plan that is – FT Alphaville