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March 09, 2005

Paul Blustein on David Mulford and Company

Blustein on Mulford

Paul Blustein does not believe that David Mulford played a constructive role in the Argentine financial crisis:

pp. 125-31: Now the silver-haired Mulford had an idea... a debt "swap."... The purpose was to eliminate... the large amounts of interest and principal payments Argentina was required to make during the 2001-2005 period.... the payments would be stretched out so taht much more would fall due in the years after 2005.... Argentina would gain time to recover and avoid default.... The... megaswap... ranks among the most infamous deals that Wall Street has ever peddled to a government.... For CSFB and a half dozen other Wall Street firms, the megaswap would be a bonanza... more than $90 million in fees.... For Argentina, it would be a bust, rendering the country's solvency even more questionable than it was already....

The new name of the game was "liability management"... arranging for debtors to stretch out or reduce their debt burdens.... In most cases, these deals were used by countries with firm market standing to save money. Mexico and Brazil... used swaps to retire... bonds... difficult to trade. Argentina's situation was different.... [t]he deal Mulford was proposing would increase Argentina's debt costs rather than decrease them; that was the price... to postpone its debt payments....

The appeal the deal had for Cavallo was obvious. Mulford's message... was that for reasons unrelated to his stewardship... Argentina was facing a liquidity crisis... $80 billion... due in the next four and a half years.... There was no need to default or impose a haircut; investors would be happy to reschedule.... Once that was accomplished, markets would start to settle down, giving Cavallo the leeway he needed to work his magic....

Ridicule... greeted this line of reasoning as the swap's terms became clear. Desirable as it might be to reduce near-term payments... the cost was far too high.... The IMF... had kind words for it in public.... But behind the scenes... the swap drew scron from the Research Department.... Mussa's anger boiled over in a table-pounding, finger-pointing exhibition.... Mussa's staff had calculated that the transaction would save $12 billion in debt payments from 2001 to 2005... at an effective interest cost of 16 percent.... To borrow so much at such a high cost made no sense for a country that was already having grave difficulty....

The swap's champions proclaimed the deal a triumph... $29.5 billion worth of securities.... "We have beaten those who were betting against Argentina," Cavallo declared.... Mulford... predicted "the market will now recover," with yields falling so that "future financing will be done at substantially lower rates"....

The markets' disappointing reaction to the megaswap is subject to conflicting explanations.... Mulford and other bankers... blamed the Argentines, accusing them of making two market-rattling mistakes. First, the government continued auctions of treasury bills in which local banks were reportedly pressured to bu.... Second, Cavallo sprang another weekend surprise that some analysts interpreted as undermining credibility... a subsidy would be paid to exporters... a duty charged to importers.... The measure was akin to a 7% devaluation of the peso for trade purposes....

Although these moves were unhelpful, it is a stretch to call them the cause of the letdown that followed the megaswap.... [T]he swap did not produce the miraculous effects that Mulford had predicted, and it arguably made matters worse...


Paul Blustein (2005), And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 15486482459).

Posted by DeLong at March 9, 2005 05:57 PM