Argentina has its back against a wall. On July 30 it may default on a sovereign-debt payment that could send its economy into a tailspin of rising interest rates, money printing, and inflation.
It could be the worst economic tragedy the republic has seen since 2001.
And the tragedy will be well deserved, because this is a drama of Argentina’s own making, a figment of political imagination tied closely with its history and culture. In Argentina, debt is identity, and this specific over-$1.3 billion debt in question, purchased by a group of hedge fund managers back in 2001, has hit a nerve.
Here’s what former finance minister Hernan Lorenzino said about it in 2012:
“The state has the capacity to make these payments. We have the funds available to make these payments. But fundamentally, we have the political will to continue paying as we have paid. The possibility of default does not exist in Argentina … (The rating agencies) pretend to install the idea that something is going to fail as they have been unsuccessfully for years. They will not accomplish this.”
For over a decade the country has refused to pay a group of hedge fund managers led by Elliott Management’s Paul Singer. This group, known as NML, refused to take a massive haircut on Argentine sovereign debt purchased after the country’s last crash. Argentina, in turn, refused to pay them 100 cents on the dollar and fought to continue doing so all the way to the Supreme Court. It lost.
On July 7, the republic will enter into settlement talks with a court appointed special master in New York. Its new finance minister, Axel Kicillof, will be there, supposedly to negotiate.
“We’re glad to see the press reports that Argentina has agreed to meet with the special master next week in New York,” said Jay Newman, senior portfolio manager at Elliott Management. “But engagement with the court or with creditors doesn’t have to wait another week. We’re ready to meet with Minister Kicillof during his visit to Washington, D.C., this week, and to negotiate without preconditions. We’re serious about negotiations, but we are still waiting for Argentina to engage in any dialogue with us.”
Remember … “supposedly.”
The reality is that Kicillof has been in Washington meeting with international bodies like the Organisation of American States for weeks. He’s been trying to convince them that Argentina should not have to honour the clause in its bond agreement with the holdout hedge fund managers that has been the crux of this case — the pari passu clause.
This clause states that Argentina cannot favour one group of investors over another. That’s what it had been doing — paying the bondholders that restructured, and not the holdouts. Last month it tried to pay everyone except the holdouts (not the best show of faith). But the judge presiding over this case, Judge Griesa, wasn’t having it and sent the payments back to Argentina.
If some investors get paid, every investor must get paid.
To Argentina, the problem is the holdouts are not investors — they’re “vultures.” They bought the republic’s debt after its 2001 default, which President Cristina Fernandez argues shows that they only meant to speculate with it.
Fernandez said as much in her speech after the Supreme Court decided against the republic. On a live 30-minute broadcast she walked her nation through a history lesson.
She told the story of 1976, the first time international debt turned to inflation. It was, she said, “without a doubt the most powerful trap we’d been in keeping us from growth, the development of Argentina, it created poverty, backwardness, homelessness, a lack of infrastructural development, investment in education, in science … “
Since then, Argentine politicians have associated speculators with their worst national nightmares. They are the lowest of the low and, as such, deserve no respect.
“This was a political decision leaders had made,” bankruptcy expert William A. Brandt, CEO of Development Specialists Inc., a firm specializing in turnarounds, told Business Insider in 2012. “Argentina is an incredibly sophisticated economy and brought this problem on itself by doing the unthinkable and defaulting on its debt.”
In that same speech, Fernandez said that paying the holdouts could bring similar claims out of the woodwork — claims to the tune of $US15 billion — which would wipe out half of the country’s dollar reserves.
Still, some contest that argument. In a note, debt specialist Josh Rosner of GrahamFisher said that even if that is true (if) Argentina could still manage the $US15 billion:
“Argentina has ignored the reality that even if that $US15 billion number was correct and the creditors unwilling to negotiate a payment formula that was acceptable to both parties, the government would still be able to manage the increased debt burden as a per cent of GDP. Moreover, late last year, at least one Wall Street firm offered to raise the full $US15 billion that the government claims it owes. If the government chose to raise capital as a means of resolving this impasse, it would normalize its relations with the international capital markets, reduce its cost of funds going forward and immediately begin to attract the foreign investment necessary to develop key industries, including its energy sector and the broader economy.”
The other argument Argentina has used to avoid payment is to say that this sets a dangerous precedent for investors in sovereign debt. If investors can avoid haircuts by refusing to restructure, why would they ever?
Argentina’s refusal to pay the holdouts has thrown the entire sovereign-debt system into question.
None of this is to say that Paul Singer and his crew have not been aggressive, sparking a sort of PTSD in the Argentine psyche. NML has used the law to go after Argentine assets all over the world, at one point getting a Ghanaian court to impound an Argentine naval vessel as collateral.
But that doesn’t make the country’s intransigence right. The tone of its politicians has crossed the line into hysterical territory. One of President Fernandez’s deputies, Carlos Kunkel, told the Argentine press that he was convinced that Judge Griesa — the man who handed down the ruling that the country must pay — is forcing negotiations because he’ll get a cut of the payout.
Would you want to lend this country money?