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How the banks let Argentina down

Argentina was brought down, ultimately, by the miscalculations of its own leaders. But others must share the blame, including the IMF. The international financial community, especially the large sell-side banks, do not come out of the debacle smelling of roses either.

All of Argentina's $95 billion in bonded debt was issued with the help of compliant banks, which picked up enormous fees. Few of them criticized president Carlos Menem when he ran huge budget deficits at a time when the economy was growing by 8% a year; no-one wanted to annoy the world's biggest international bond issuer.

Even when spreads widened and Argentina could no longer access the markets, the banks continued in the lucrative business of liability management. The apotheosis was the country's $29 billion mega-swap in June, which generated $125 million in fees, and only served to increase the country's indebtedness.

Argentina saw to it that most of its biggest international underwriters were also domestic market makers. This increased their exposure - the banks called it commitment - to the country, and made it even less likely that they would speak out about the government's policies. Every recent crisis in Argentina, up to and including last month's brutal events, went the same way: banks' research teams didn't, or wouldn't, say how ugly things could get, instead emphasizing a best-case outcome when everything turned our right.

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