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Emerging Markets

Argentina and Mexico Crises Cause Similar Problems for Treasury

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September 26, 2014

The uncertainty introduced by uncontrolled sovereign meltdowns is a key issue.

Argentina’s sovereign default this past summer may seem reminiscent of Mexico’s Peso Crisis nearly 20 years ago. Although there are a lot of important differences, for treasury the challenges are nearly the same: how to remain profitable and fund local operations effectively in an environment where revenues are denominated in a rapidly depreciating currency and interest rates are rising fast.

Take Mexico’s so-called Tequila Crisis. There were several worms in this toxic mix. First, the Mexican economy had not benefitted much from the North American Free Trade Accord, implemented at the beginning of 2004. And government spending to rally voter support before the presidential elections put a strain on the coffers. Between January and August of that year, the peso fell by 9.5 percent (“Mexico: Time to Look for Cover?” International Treasurer, August 8, 2014).

Over the course of the first half of 1994, speculators and retail investors had become increasingly concerned that the peso was overvalued, and they began moving out of peso assets and into dollar assets, putting more pressure on the currency. The central bank’s currency reserves declined precipitously in the second half of the year, making it ever more likely that the government would have to abandon its “crawling band” peg to the dollar. The crisis came to a head in December when newly elected president Ernesto Zedillo announced a 15 percent devaluation.
The handwriting was on the wall as early as early as the second quarter that treasurers needed to hedge their currency risk, and fast, since the cost of doing so was rising quickly. International Treasurer reported that the best way to do so was to use coburturas, a type of forward but that the hedging window would close when the presidential election was held on August 21.

As the crisis played out, Mexico and most of its locally domiciled corporates were shut out of the capital markets, the economy tanked, and the US eventually put together a $50 billion bailout package with other countries and the IMF to help Mexico recover.

Argentina’s story is much different. The country’s worst economic crisis in modern times occurred in 2000-2003. In 2001, Argentina defaulted on its sovereign debt—for the eighth time in its history. This resulted in its exclusion from the international capital markets, but restructurings in 2005 and 2010 led to reductions in about 90 percent of its outstanding debt. Much of the rest was scooped up by hedge funds like Elliott Management’s NML Capital Ltd and Aurelius Capital Management. The funds have repeatedly sued to force Argentina to pay them in full. Last summer the US Supreme Court refused to hear Argentina’s appeal of a lower court ruling that sided with the funds.

The difference between the Argentina and Mexico cases is that Argentina’s economy had done reasonably well since 2003. The debt in question was accumulated before that period in large part due to an attempt to peg the currency to the dollar.

However, this is of little succor to treasurers who need to operate in crisis-stricken countries like Argentina. The government has banned retail purchases of dollars, limited imports and told companies to repatriate cash.

As iTreasurer recently reported (“LatAm Treasurers Look to Local Help for Operating in Volatile Markets”), “MNCs with presence in Argentina are seeing their businesses forced to adapt to changes they would never undertake were it not for the increasingly arduous and arbitrary rules that are mainly meant to protect foreign currency reserves and thus the government’s margin to operate and stabilize the political environment.” 


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