Brad Budsberg

 

Daniel Hertzberg and S. Karene Witcher,

“Two Banks Downgrade Argentine Debt, Reflecting Cautious Attitude on Loans,”

Wall Street Journal, 1/17/85.

 

 

Main Point:

The basic argument of the article is that the international debt crisis was beginning to affect countries in such ways that banks were taking actions in regards of safeguarding against defaults on loans and irregular interest payments. 

 

Summary:

As Argentine begins to cope with its huge foreign debt, some banks are taking action to protect against either defaulting or erratic interest payments by the debtor country.  The debt crisis is causing uneasiness among both smaller and larger banks as new approaches are sought to handle the situation.

 

Two Bank Actions:

Due to the past history of late or missed interest payments, Republic New York Corp.  and Dallas-based RepublicBank Corp.  have placed a great proportion of their Argentine credits on non-accrual status.  By that, interest will not be recorded until cash payment is actually received.  This causes banks to record irregular earnings stream rather than a constant earnings stream.  Also, RepublicBank set aside loan-loss reserves equal to 14% of Argentina’s loans in an attempt to brace itself against further problems.  This sends cautious signals about Argentine’s repayment prospects as well as underscoring how banks view Argentine loans.

 

Reactions:

Many larger banks are holding off on switching majority of Argentine’s loans to non-accrual status.  This caused the Federal Bank regulators to force many banks to switch while the U. S. Treasury supplied Argentine with a short-term loan to help make payments and allowing many banks to drop the non-accrual status once again.  The reasoning behind not following the precedent set is for the improvements made in coping with the huge debt accrued by Argentine.  The banks financial package to help Argentine make its payments again to allow more loans to help pay off old loans.

 

Side Note:

By allowing such actions, banks increase profits thus increasing stock value while keeping Argentine underneath their “gold boot.”  How can one become financially stable, if there is a leach draining all profit away at all times?