"Must Debt be the Achilles Heel of development?

Argentine default and the future of global finance"

Summary

Emerging market economies have been encouraged to tap global capital markets for financing economic development: but many have learned, from bitter experience, that issuing foreign-currency denominated liabilities leaves them highly vulnerable to shifts of market sentiment. When the peso collapsed at the end of 2001, for example, Argentina’s foreign-currency sovereign bonds rose in value to about one a half times annual output and the country now faces a clearly unsustainable debt burden.

As recently as 2001, the IMF put forward a plan called the Sovereign Debt Restructuring Mechanism to handle such crises; but earlier this year the Executive Board accepted that there is insufficient political support to proceed further with it at present. The still-pending restructuring of Argentine debt, involving $100bn or more of sovereign bonds, will be an acid test of the market’s capacity to carry out this task on a voluntary basis; and it is expected to set important precedents for the future of the international monetary system.

Why was Krueger’s plan rejected? How will the negotiations to restructure the debt proceed? What will they imply for the future of the international financial system? These are three of the issues to be investigated by contacting the key players and analysing what is observed using the tools of strategic analysis. A deliberate part of the plan is to involve the participation of skilled game theorists at the University of Warwick - and to attract good graduate students. The potential value of conducting a strategic analysis of financial negotiations was amply demonstrated by Klemperer and Binmore in their work on the auctions for selling 3G telecommunication licences. In the debt-restructuring context, the objective is that of achieving fair and sustainable ‘burden sharing’ among creditors and the debtor government and it is planned to use a classic ‘alternating offers’ game adapted to suit current circumstances.

In conclusion, I will draw some implications for revising the original Washington Consensus outlined by John Williamson in 1989 as a policy guide for Latin American countries.