ISDA PRESS REPORT - NOVEMBER 16, 2001

LATIN AMERICA
	*	Argentina's Cavallo Insists The Peso Won't Be Devalued - The
Wall Street Journal

RISK MANAGEMENT
	*	Basel II Accord in danger of failing, says German banker -
Risk News

Argentina's Cavallo Insists The Peso Won't Be Devalued
The Wall Street Journal - November 16, 2001
By David Luhnow and Michelle Wallin

If Argentina's financial crisis gets much worse, the country would adopt the
dollar or euro as its official currency rather than allow the Argentine peso
to devalue and trade freely on the open market, Argentine economy minister
Domingo Cavallo said Thursday.

In an interview, the architect of Argentina's decade-old monetary regime,
under which one peso equals one dollar, said Argentines accustomed to a
stable currency would never accept a peso floating freely on the open market
-- the policy adopted under past financial crises by Latin America's two
largest economies, Brazil and Mexico.

"The peso would be repudiated, just as the austral once was," said Mr.
Cavallo, referring to Argentina's doomed former currency. "So the peso only
makes sense, will only continue to exist, if it's backed by dollars and at a
one-to-one parity" or linked both to the dollar and euro, he said.

"For this reason, we maintain that in extreme circumstances, it's much more
logical to say, 'We'll only use the dollar' or 'We'll only use euros,' or
another credible currency," he said.

Read the full text of an exclusive interview with Argentine Economy Minister
Domingo Cavallo.  As Argentina endures its fourth year of an economic slump,
which Mr. Cavallo described as a "depression," local union leaders and some
foreign economists have called for policymakers to let the peso devalue,
making Argentine goods less expensive abroad. But with 70% of bank accounts
in dollars, along with most contracts like rental agreements, undoing such
de facto dollarization would be impossible to implement or enforce, Mr.
Cavallo said.

The Harvard-educated economist insisted, "Argentina will never give up
convertibility," which allows both currencies to exist side by side. But
Argentines don't necessarily believe that: They have pulled nearly $13
billion out of the country's banks so far this year. That has left the
central bank with only about $6 billion of hard-currency reserves in excess
of the money in circulation. If that cushion were to disappear, then the
system would be sorely tested.

Once hailed as the engineer of an Argentine economic miracle in the early
1990s that ended decades of runaway price increases, Mr. Cavallo, 55 years
old, has come under fire during his second tenure, which began in March
after the first two economy ministers under President Fernando de la Rua
quit.

Although Mr. Cavallo inherited an economy mired in a long recession, he has
been unable to generate growth. Meantime, creditors have demanded
ever-higher interest rates to lend to the country. Argentina finally
admitted this month it can't pay its growing interest bill, asking lenders
at home and abroad to take huge write-offs on as much as $60 billion in
bonds. The country is weighed down by overall debt of $132 billion.

But the man at the center of the storm, famous for his temper, looked
relaxed and confident Thursday after clinching a long-awaited deal with
opposition governors of Argentina's biggest provinces to carry out big
spending cuts, saving the federal government some $2.3 billion a year in tax
transfers. The deal is key for Argentina to convince creditors like the
International Monetary Fund the country will balance its books for the rest
of this year and next.

"This ratifies that in Argentina our elected officials are, in the end,
coming together to resolve problems," he said.

U.S. Treasury Secretary Paul O'Neill, who has opposed fresh financial aid
for Argentina, gave the country a vote of confidence Thursday, saying the
situation has become "quite encouraging." He praised President de la Rua for
personally getting involved in negotiations to lower interest payments on
Argentine debt. "He's not crying for huge volumes of new additional money.
He's saying we, the people of Argentina, led by the president, are going to
figure this out and create sustainable conditions," Mr. O'Neill said.

Messrs. O'Neill and Cavallo will meet today to discuss the country's debt
crisis, which some ratings agencies have labeled a default, and ways to get
Argentina's economy going again.

Argentina's current plan -- to get investors to exchange their current bonds
for ones that pay less interest -- could hit legal problems if foreign
creditors decide Argentina hasn't provided enough guarantees of repayment
and is favoring local investors over foreign bondholders. Mr. Cavallo said
that won't be the case.

"The offer [for foreigners] will have terms that are very equitable compared
with what we are offering Argentine investors," he said. The offer to local
investors would exchange bonds paying an average 11% interest for new notes
paying no more than 7% but will have what Argentina claims are better
guarantees since the notes will be backed by tax revenues.

Local banks and pension funds have until next Friday to complete the deal,
Mr. Cavallo said. Details of the offer for foreign creditors are expected in
the next few months.

Separately, Mr. Cavallo said Argentina will end the year with a federal
budget deficit of no more than $7.5 billion. If bondholders agree to take
the debt exchange on offer, he added, then the deficit could come closer to
the $6.5 billion promised to the IMF at the start of this year.

For next year, Mr. Cavallo pledged a balanced budget. He said the government
plans to cut spending by $3 billion in addition to the $2.3 billion it
expects to save from lower tax transfers to the provinces. If the government
saves $4 billion from restructuring its debt, as it also expects, the total
$9.3 billion in savings should more than cover any shortfall in revenues,
even if the economy were to remain sluggish, he said.


Basel II Accord in danger of failing, says German banker 
Risk News - November 16, 2001
By David Keefe
 
16 November - The Basel II bank capital Accord is in real danger of failing
unless clear solutions are found to several open questions about the Accord,
a senior German banker told a conference in London yesterday.

One of the key issues is the way lending to small to medium-sized
enterprises (SMEs), known as mittelstand in Germany, could be choked off by
the credit risk capital charges proposed in the Accord, said Wolfgang
Hartmann, member of the managing board of directors at Germany's
Commerzbank. He was speaking at a banking conference organised by the
Financial Times newspaper. 

He noted German Chancellor Gerhard Schr?der has threatened to veto Basel II
unless the Basel Committee for Banking Supervision, the architect of Basle
II and the body that regulates international banking, agrees fair
arrangements for SMEs. 

The complex, risk-based Basel II proposals will determine from 2005 what
proportion of their assets large international banks must set aside as
reserve capital to guard against banking risks, including credit and market
risks as well as, for the first time, operational risk. 

Bank lending to SMEs, which Hartmann described as the backbone of German
business, is traditionally long term. Under the current Basel II credit risk
proposals longer-term lending will attract higher capital charges than the
shorter-term lending more customary among banks in other major economies.
That, said the German government and the Bundesbank, could discourage
lending to German SMEs, which often have weak equity bases and are more
dependent on bank borrowing. 

Hartmann said Commerzbank is strongly committed to SMEs and has a large
number of customers among them. 

"Clearly, Basel II must come up with an answer to the political issues if it
does not want to endanger the overall acceptance of its rules," he said. 

Basel II will also fail if a respectable number of international banks do
not develop a track record for the different internal ratings based (IRB)
approaches to calculating credit risk capital charges under the Accord,
Hartmann said. 

Commerzbank's goal for 2005 is to obtain certification for the IRB
foundation approach, while starting to collect necessary data for the more
complex IRB advanced approach. That would enable Commerzbank to switch to
the advanced approach as soon as possible, Hartmann said. But Hartmann said
the incentives to progress beyond the standardised approach, the simplest of
the three methods of calculating credit risk charges under Basel II, were
not strong enough and must be changed. 

He said the current caps on the two IRB approaches would limit the benefits
to banks of using these more complex methods, adding that he hoped the new
calibration of risk weights promised by the regulators would meet this
requirement. 

Hartmann said the Basel Committee's paper on potential modifications to the
Basel II proposals issued earlier this month was a step in the right
direction. 

The Basel Committee hopes to issue its third consultative paper on Basel II
in late February next year, and publish the final version of the Accord by
the end of 2002. 

Basel is intended in the first instance for international banks of the Group
of l0 leading economies, but is designed for banks of all sizes. Basel I,
the current bank capital adequacy Accord that dates from 1988, was later
adopted by more than 100 countries. 

The European Union intends applying capital adequacy rules closely modelled
on Basel II to all banks and investment firms in the 15-nation EU from 2005.

**End of ISDA Press Report for November 16, 2001**

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