Default? Argentine, U.S. debt negotiations down to the wire

Default? Argentine, U.S. debt negotiations down to the wire

Argentina's economy minister, Axel Kicillof, via Mr. Kicillof's Facebook page.
Argentina's economy minister, Axel Kicillof, via Mr. Kicillof's Facebook page.

WASHINGTON, July 30, 2014 – Almost perversely, as stocks sink in pre-Fed trading today, Argentine bonds caught a bid, jumping to a three-year high Wednesday morning.

The current Argentine bond rally is apparently based on a rumor that officials of that country are nearing a deal with its holdout creditors–called “vultures” by Argentina’s current socialist president Cristina Kirchner–that could stave off the Latin American nation’s second default on its obligations in 13 years.

The rumors gathered steam as Argentina’s economy minister, Axel Kicillof was seen slipping into a New York office building this morning for another meeting with U.S. mediator Daniel Pollock.

The pair met yesterday in marathon negotiations that lasted some twelve hours during which, according to several sources, “frank exchanges of views” took place. That phrase is Washingtonspeak indicating the atmosphere of those discussions was thick with four-letter words.

History of the impasse

With its decades-long modern history of periodic but lengthy periods of Peronist and post-Peronist socialist rule, Argentina–potentially one of the world’s greatest countries–has long been hampered by its paradoxical embrace of and contempt for capitalism.

Investors have long learned that, while they can make money in that country, they always risk nationalization of their successful enterprises or default on bonds they’ve invested in.

The current Punch and Judy showdown between the Peronist government of Cristina Kirchner and U.S. hedge funds and other creditors is yet another chapter in this ongoing game, one that stretches back to Argentina’s earlier 2001 default on its obligations.

Some creditors eventually settled with the Argentine government for a fraction of what they were owed, generally 30 cents on the dollar or thereabouts. But a number of American hedge funds, which had purchased baskets of these defaulted obligations after the 2001 debacle, eventually sued Argentina in U.S. courts for the full repayment on it–some $1.5 billion.

Bringing the crisis to a head approximately one month ago, Thomas Griesa, a U.S. District Court judge, decided in favor of the hedge funds, halting a $539 million interest payment from Argentina to current bondholders because that figure did not include money to pay the hedge fund holdouts that refused to become part of earlier agreements.

The Argentine government has until midnight tonight to resolve the issue or they will be in default on all current debt obligations.

Potential settlement terms and market reaction

Many analysts believe that Argentina will reach some kind of settlement shortly that will resolve the legal impasse. Bloomberg quotes analyst Patrick Esteruelas as asserting “Kicillof wouldn’t have traveled to New York, taking the unprecedented step to meet face-to-face with the holdouts, and spend all that political capital, to go back to Buenos Aires empty-handed.”

Whatever the case, Argentine ETF ARGT jumped 4.07 percent in active trading, with Argentine banks proving the biggest winners thus far. Argentina’s Merval stock index also soared an impressive 5 percent.

Nevertheless, students of Argentine economic history will note that this is a country heavily tilted toward socialist governments that often spend freely to buy votes, currying favor with foreign investors when they can extract capital for their ruinous schemes and then essentially trying to steal it when their grandiose plans come to a bad end.

As one online commentator noted with considerable accuracy

Argentina voluntarily enters into an agreement to borrow money from investors knowing up front that it has a hard and fast obligation to pay back the money. Argentina then proceeds to badly mismanage its economy and abrogates its obligation to creditors that it willingly and knowingly accepted. The creditors want Argentina to abide by its original agreement, and that makes the creditors “vultures”? I suppose that is because Argentina is a particularly nice country? Argentina is essentially trying to raid the assets of the hedge funds that provided the funding, but the hedge funds are the criminals for objecting to the raid. Sorry, but Argentina screwed up, so Argentina needs to admit they are at fault and make it right.

Argentina is indeed “screwed up” economically. That country has already devalued its currency once this year and could do so again. Matters would be made worse by a new default, which might then trigger bond claims in the vicinity of $30 billion U.S. The country’s economy is contracting severely, and real inflation is estimated to be running at around 40 percent, rivaling that of Venezuela’s equally disastrous post-Chavez regime.

The ray of hope surfacing today is news that a consortium of Argentine banks is offering to purchase holdout claims, something that might finesse the issue if the parties agree.

We’ll update this ongoing story if and when details become available. In the meantime, this issue hangs heavily over Wednesday’s already struggling U.S. stock and bond markets.

A failure to resolve it could cause further erosion of confidence in a domestic market already nervous about potentially rising U.S. interest rates and troubled by a deteriorating international situation and by the flood of illegal immigrants pouring across lightly-policed U.S. borders.

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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17