Gold: Why is the Argentine experience so
significant today?
J.M. B.: It is significant because it was the
first time that the idea of debt sustainability
was applied to a formal debt restructuring.
At the time, most people opposed the idea,
mainly on political grounds. Just five years after
Argentina successfully restructured its debt in
2005, the International Monetary Fund began
implementing debt sustainability frameworks
for European countries, starting with Greece
in 2010. Now, every multilateral organisation
and most investment firms conduct debt
sustainability exercises.
What is of greater relevance to the people of
Cyprus today, as it was then to the people of
Argentina, is the fact that debt sustainability
implies the opportunity to have a slightly better
distribution of the financial costs of the crisis
and thus avoid yet another political crisis. While
the people of a country invariably bear most
of the costs during crisis, sustainability helps
distribute the costs in a fairer or more even way.
For example, during the Argentina crisis, the
Argentine people paid as much as $150bn while
investors, banks and other bond holders ended
up also losing about $70bn, representing about
one-third of the total cost.
Gold: How did you succeed?
J.M. B.: Argentina succeeded for two reasons.
First, the authorities gave us their full support
and, more importantly, they genuinely believed
that this was the right approach to find a fair
resolution to the crisis. The idea of ensuring
that the debt restructuring would be sustainable
immediately was so critical that both the
then Minister Roberto Lavagna and Chief
Negotiator Guillermo Nielsen were keen on
giving investors “upside” should the economy
perform better than we envisaged through the
use of GDP Warrants, which actually turn out
to be one of the best performing instruments.
In addition, Argentina committed to a strong
fiscal performance for the first four years of the
programme, providing a strong anchor to the
restructuring. This was very important, but
no doubt the debt write-offs were the critical
element of Argentina’s success as it lifted a huge
debt burden that allowed the economy to start
growing at an average pace of over 10% for the
first few years.
Second, Argentina succeeded because of the
extraordinary commitment, courage and
effort of Roberto Lavagna and Guillermo
Nielsen. I saw first-hand the personal efforts
and dedication of Nielsen. I never seen any
one in my life give so much for a cause as he
did, facing angry investors, pensioners in Italy
and Germany, explaining to them Argentina’s
situation. The Italian public ended up on
Guillermo’s side. I will never forget that. There
were too many positive things on the human
side that no doubt had a very positive impact on
the lives of millions of Argentines.
From a market perspective, we succeeded
because we showed investors that Argentina
could not repay its original debt after the
massive foreign exchange adjustment. Although
no one likes to take losses, it became clear to
investors that the investment paradigm that
Argentina’s currency board would be around
forever was flawed and that without it, the
performance they expected would never hold.
We used debt sustainability to show the debt
level that the Argentine economy could now
service. Not surprisingly, after losing about 67%
of the dollar value of the economy, a 67% debt
write-off didn’t seem like rocket science. There
was a fully-fledged model that showed this but
this was the basic concept.
Gold: By comparison, Cyprus’s needs appear
to be extremely small, yet the Troika’s
financial assistance package will have a harsh
impact – hopefully a temporary one – on
much of the country’s population. Could it
have been less painful?
J.M. B.: Absolutely. It could have been and
should have been markedly less painful. The
European Union – especially the big countries
– had a responsibility to ease the pain in
Cyprus. They have the resources. Cyprus is
not an innocent bystander but it suffered from
the same banking games that affected other
European countries. Because of its geopolitical
importance, the impact on Cyprus of the crisis is
actually much worse, which again indicates the
importance of greater and broader support.
Gold: The decision to use uninsured deposits
in the island’s two biggest banks has been
a controversial one, not least because it has
never been done before. Was it a good idea
and do you think it will be used elsewhere?
J.M. B.: I don’t think it was a very good idea
and I don’t believe anyone else will try to
replicate it. In fact, seizing deposits is a very bad
idea that you only use when you don’t have any
external support, as happened with Argentina.
However, in the case of Cyprus, the European
Union and the European Central Bank should
have provided much stronger support early on
to avoid such drastic an