[Posted mostly for the first paragraph, "estimated default probability is now assessed at 90-95 per cent." Well, from a major UK business newspaper, here's the case for "It ain't so bad -- Whaddya crying about?" Time will tell. --Andre]

Headline: Talking Stock: Shaky tango

Source: Philip Coggan, Financial Times, 13 August 2001

URL: http://markets.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3SDDPBCQC&live=true&tagid=IXLTEW9YICC&subheading=bonds

The warning from BNP Paribas is stark. "We think Argentina is going to fail - with default likely and imminent. Our economists retain their default scenario, expected to play out within the next 1-2 weeks, estimated default probability is now assessed at 90-95 per cent up from 60 per cent three weeks ago."

BNP dismisses news of talks between the International Monetary Fund and Argentina, saying that the fund will only bring forward new aid payments and will not grant the $6-$9bn Argentina is requesting to rebuild its foreign exchange reserves.

Suppose that BNP is correct and that Argentina does default. Will equity markets be subject to the same pressures as occurred in 1998 when the Russian default was followed by the near-collapse of the hedge fund, Long-Term Capital Management?

News of an Argentine default would undoubtedly cause a short-term sell-off in equity markets - in the sense that traders would mark down prices on the news.

But it seems unlikely that markets will be hit as badly as they were in 1998. For a start, 1998 is not that long ago and investors have not recovered their appetite for emerging market equities in the interim. The same is true of the emerging market debt markets - after what happened to LTCM, few investors will have wanted to hold long emerging market debt/short developed market debt positions.

Thirdly, if the default does occur, it has been a long time coming. Figures show that banks have cut their exposure to Argentina and it seems likely that any nervous bond investors will have sold their Argentine debt long ago. Fourthly, Argentina has a relatively small part to play in global trade - it is a much less significant player than the south-east Asian economies which rocked global equity markets in 1997-98.

BNP's advice to investors is limited to selling stocks with a Latin American exposure, of which it cites the following: HSBC, Telefonica, Carrefour, BSCH, BBVA, Volkswagen, Fiat, Casino, Holcim, Parmalat Finanz, Sol Melia, Scania, Impreglio and GEA.

-- Andre Weltman (aweltman@state.pa.us), August 14, 2001