Argentina and the Paris Club

Argentine officials have been negotiating a repayment plan with the Paris Club over the outstanding debt, one of the last remnants of Argentina's $100 billion debt default in 2002.

Members of the Paris Club group of creditors want Argentina to repay roughly $9 billion in defaulted debt within three years and to make a big initial payment, a local newspaper reported this month. This would be needed for creditors to reopen credit lines for the purchase of capital goods and medium-term investments in Latin America's fast-growing No. 3 economy.

BUT, what is tthe Paris Club and why the Argentine officials are negotiating with them?

The Paris club is an group of financial officials who meet monthly in Paris attended by creditors to discuss debt issues. Among other things, the Paris Club addresses the issue of coordinated debt relief for developing countries that cannot service their debt.

The two major events that the Club intervened were the Iraq write-off in 2004 and the Argentine partial default of its external debt in 2002. 

Talking about Argentina, this default was caused by an economic crisis in the mid-1990s and recession between 1999 and 2002. In 2002,  Foreign investment fled the country, and capital flow towards Argentina ceased almost completely. Besides, the local currency was floated, and the peso devalued quickly, producing higher-than-average inflation.

In 1990 the country was suffering from a hyperinflation and the peso was fixed to USD and also a convertible currency (Russia also had a convertible currency. It fixed at artificially higher levels - a recipe for disaster). To secure this convertibility, the Argentine Government needed to have USD reserves at the same level as the cash in circulation. This measure lowered inflation and stabilised prices. Because of huge external debt, investors lost confidence and there was a flight of dollars away from the country, resulting in reduced competitiveness, increasing unemployment. Political issues also increased the problems of the Argentine economic scenario (Debt ballooned - high government spending, corruption, tax evasion).

In 2001 as I said earlier, the recession has created a fear among people and the banks started to see the cash disappear. People withdrew money and turned pesos into dollars and sent them abroad (USD up - so government had to keep buying USD to keep pesos fixed!). 

On December, after the riot, Adolfo Rodriguez was appointed as president but resigned and was replaced by Eduardo Duhalde that made decisions like giving up pegging peso/USD that had been in place for 10 years! Also, Eduardo and the Government decided that the banks had to convert all USD savings to pesos, causing higher inflation due to the currency devaluation.

The recovery came in 2003 because of a series of factors such as: devalued peso made Argentine export cheap and competitive abroad, high soy prices producing massive surplus (China major buyer), improve in tax collection and huge trade surplus due to government intervention.