Looking at Europe from Uruguay

August 17, 2010

I had the very good fortune to have lunch today with Carlos Steneri, the veteran Uruguayan debt manager and negotiator who is finally leaving public service after many decades to do some work in the private sector. I’ve known Carlos for the best part of a decade now, and have the greatest respect for him. He’s seen a lot over the course of his tenure working for Uruguay, and it’s worth listening to his highly-experienced take on today’s global situation, and how the likes of Greece and Italy can learn from Uruguay’s experiences.

Carlos reminded me that Uruguay had a Brady program — something which you wouldn’t necessarily expect, given that it was one of the very few Latin American countries not to default on its debts in the 1980s. The Brady scheme took defaulted sovereign bank loans and turned them, with some help from the US Treasury in the form of zero-coupon Treasury-bond collateral, into performing, liquid, tradable bonds — something which marked the beginning of the end of the Latin American “lost decade” as banks started being able to offload their formerly-bad debt at ever-higher prices.

But Uruguay, too, took advantage of the program, swapping a large chunk of its bank debt into Brady bonds, in the process essentially paying 56 cents on the dollar to buy back its own debt. (Which was the market price at the time.) That did wonders for the country’s debt profile, without harming its reputation at all — a large part of its investment-grade credit rating in the following years was due to the fact that it had never defaulted.

The problems facing the PIGS are very different from those which faced Latin American economies in the 1980s. The debt/GDP ratios are much, much bigger, for starters. And none of them can do an Uruguay-style restructuring-while-current, for the good reason that none of them have performing debt trading at 50 cents on the dollar.

But Carlos reckons that some kind of European Brady plan makes sense — he calls it the Trichet plan. Germany would take the lead in providing the collateral, in the form of zero-coupon 30-year notes — and get money back for issuing them, as well, so it wouldn’t lose out. The PIGS would at the very least be able to term out a bunch of their short-term maturities, dealing with their liquidity problems. And the new instruments, with embedded partial German guarantees, would be more palatable to investors than plain-vanilla Greek debt, making it easier for banks to offload the paper into the secondary market. That’s important, because a large part of the sovereign-debt problem in Europe isn’t the sheer size of the debt so much as it is the leveraged nature of the banks which hold it. If the debt can be moved off bank balance sheets and into the hands of bond investors, the amount of systemic risk would fall dramatically.

This is neither a necessary nor a sufficient solution to the debt problem, of course, but it might be a helpful step in the right direction, and at the very least demonstrate a willingness to face up to the magnitude of the crisis facing Europe. Carlos was adamant that muddling through is simply not going to work — and the longer it seems that Europe is trying just that strategy, the more painful the eventual crunch is likely to be.

Meanwhile, small countries in general, and Uruguay in particular, seem to be in a much healthier spot, these days, than the Europeans they used to borrow from. Their domestic pension funds save far more each year than the government borrows, which means that there’s a healthy domestic savings rate and no need for Uruguay to tap any foreign investors at all. The tourist trade in and around Punta del Este is booming, especially as Brazil’s southern states continue to thrive. (Punta del Este is a lot closer to the southern states than Rio de Janeiro, and much safer, too: no need for bodyguards in Uruguay. Plus, it has casinos.) Uruguay is a highly-educated, highly-dollarized, highly-professional economy, which also happens to have a hugely valuable deep-water port in Montevideo. It’s not the offshore banking haven that it used to be, but that’s no bad thing. For institutional investors small enough that a Uruguayan investment is still capable of moving the needle, it has a much rosier outlook, I think, than the likes of Italy or Spain. Not least because all of its debt woes are now, finally, behind it.

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