Posts Tagged ‘Argentine people’

Greece: could it be tempted to go into default? Latin America sets an example

April 28, 2012

The European Union, the IMF and other creditors have decided to help Greece avoid default on its sovereign debt, but is a default really out of the question? A number of other countries have found it quite convenient to remain in default for 10 years or more. Recent history suggests Latin America may be an inspiration for that.
Take Argentina for an example. It is no stranger to defaults. Its central bank holds most of its reserves at the Bank for International Settlements (BIS) in Switzerland. This is because of its last default on its international debt 10 years ago The BIS has a special legal status as the “central banks’ bank,” backed by immunity provided by the Swiss government, preventing creditors from seizing a debtor country’s assets held there.
With its attachable assets safely at the BIS, Argentina has settled with 93% of its creditors at a fraction of the original claims, but the remaining 7% are still making vigorous efforts to seize its assets all over the world. Hence Argentina’s continuing need for the BIS. However the BIS arrangement has a price – the bank pays only around 0.4 % of interest. If the reserves were held conventionally, Argentina could be earning about 2%. The estimated loss is about $675 million per year.
The Argentinian people already suffered enormously in the financial crisis which led to the default. I was in Buenos Aires at the time. A thief attacked me as I left my hotel and tried to wrestle my watch off me. Queues of destitute people waited for free handouts of food from restaurants and supermarkets. The losses on the BIS arrangement in the end mean further losses for the people.
Another example on a smaller scale is Paraguay, which failed to pay back money it raised from Swiss banks in the 1980s. It is in default since it failed to conform with a Swiss court judgment of 2005 that it must honour a Paraguayan government guarantee given to the banks. So it too has chosen to park its reserves with the BIS. Not only does Paraguay forfeit interest – some $100 million per year – but it recently revealed that it was also paying 9 million dollars a year of professional fees to keep the arrangement going.
So the Paraguayan people have to put up with financing these losses year after year, while the BIS protection prevents the Swiss banks from recovering their loans.
Many central banks keep funds at the BIS for entirely legitimate reasons, but the worldwide average is 4% of reserves. One may wonder why the BIS wishes to protect debt defaulters whose assets a court may otherwise be justified in seizing. It is unlikely to explain. When I covered it as a Reuters correspondent in the past, it consistently refused to discuss its affairs.
Greece may not be out of the woods. Could it yet be tempted by these Latin American precedents?

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