Tuesday, June 21, 2005

Don't Cry For Argentina

The WSJ reports (subscription required) on the perils of lending to unstable governments. I'd include the Euro area in that category.

Three years after defaulting on some $80 billion in private loans, Argentina has agreed with most of its creditors to restructure its broken contracts. As painful as this has been for investors who are taking a hair cut, it is a free-market resolution of the largest and most complicated bond restructuring in history.

Argentina had been offering its investors, mostly European pensioners, just 25% of their money back. But the final result is a bit better.

In its loan workout, Argentina offered its creditors new bonds worth around 34 cents on the dollar.

This sorry episode shows that sovereign nations can go bust. Argentina had tied its currency to the $, but not its economic practices. When times got hard, they devalued, causing massive hardship to Argentinians. To avoid that heat, the government transferred the pain to the folks least able to protest - those pensioners.

I take 2 lessons from this.

1. Never lend money to Argentina.

2. Don't invest in Euro bonds. If, as is posssible (but not probable), it falls apart, you'll lose most of your money. There are plenty of safer places to keep your cash.