Keys to the Argentine ‘default’: why can not it pay? What is the solution to this crisis?
- The Government of Cristina Fernandez exhausts the negotiation period with the vulture funds, but maintains negotiations to avoid total non-payment.
- The lack of agreement for the payment of 539 million dollars has caused that Standard & Poor’s has placed the country in suspension of payments.
- “The solution will be the worst possible: They will force Argentine private banks to buy that debt,” economist Javier Santacruz predicts.
- Argentina and financial agents argue about the suspension of payments.
- Argentina, at a new crossroads.
The weeks of negotiations finally did not come to fruition. At the last hour of this Wednesday (Spanish time) the Argentine Government and its creditors failed to reach a satisfactory agreement , which has placed the South American country in a new position of suspension of payments ( default , in English), insofar as the deadline to face the obligations has expired. Despite the explanations and excuses of the Executive of Cristina Fernandez, the credit rating agency Standard & Poor’s declared Argentina in “selective payment suspension”.
In 2001 Argentina declared the non-payment of more than 95,000 million dollars in foreign debt; from this default comes this crisis “Tomorrow will be another day and the world will continue to walk”. These words of the Argentine Economy Minister, Axel Kicillof, show an apparent tranquility that contrasts with the appreciation of international markets. And is that recently the S & P rated Argentina as the most risky country in the world in which to invest in public debt, above countries such as Venezuela, Ukraine or Pakistan. The Blackrock investment fund, the most important in the world, places Argentina seventh by the tail among the countries with the highest risk of default on their sovereign bonds. The finances of the South American country are now in the spotlight. Here are some keys to understand what is happening:
An unpaid debt 13 years ago
- 8% without agreement. In 2001, Argentina was unable to pay more than 95,000 million dollars in foreign debt, so it proceeded to renegotiate with creditors. Thus, in 2005 and 2010, it convinced 92% of the creditors to accept an exchange of those bonds that were failed by others to be paid in the future. The remaining 8% of creditors, however, rejected the restructuring of this debt, and began to litigate with the objective of obtaining what was initially agreed by contract.
- Argentina loses in the US Among the creditors who rejected an orderly default are several ‘hedge funds’ (vulture funds) that acquired this sovereign debt as early as 2001 at a bargain price and bet on going to court in order to obtain a high return . After more than a decade of litigation, in 2012 a US judge agreed with the creditors, to whom Argentina would have to pay more than 1,500 million dollars. The Government of Cristina Fernandez appealed this decision and last June the Supreme Court of the United States ruled that the Argentine Government must definitely pay the debt owed to these investors.
- A blocked payment. Then we come to the moment when the Argentine administration has to pay 539 million dollars to the old creditors who accepted the restructuring. The problem then is double, since on the one hand the US judge has frozen this payment, arguing that before they have to collect the vulture funds, which have just won their litigation. On the other hand, investors who in the past accepted debt write-offs did so with a legal guarantee that Argentina would reimburse them if other investors obtained more advantageous agreements (the so-called RUFO clause). That is to say, that the situation is entrenched since the country presided over by Cristina Fernandez can not afford so many payments.
Why can not Argentina pay?
The currencies, keys. In the Argentine economy, historically hit by high inflation, currency reserves have an enormous weight, since they serve, among other things, to prevent prices from rising even more despite the outflow of capital abroad. A few years ago, the so-called exchange rate exchange restricting the purchase of foreign currency (to prevent capital outflows) was lifted, which has only compromised Argentine reserves. Already in January the country registered turbulences due to the strong purchases of dollars by its citizens.
As explained by Javier Santacruz, an economist at the University of Essex, “in less than two years reserves have been reduced by 60% , from more than 60,000 to less than 27,000 million dollars,” he explains. And it is that the Bank of Argentina uses the dollars in its power to avoid part of the constant devaluation of the peso. “In addition, there are problems of foreign trade, since after years of bullish cycle in raw materials, this has been reversed, and the net position of Argentina is negative,” he says. In this context, facing an unexpected payment of up to 15,000 million dollars (calculations of Credit Suisse) to its creditors would compromise the public accounts of the country .
A countdown month
With the pressure of a bankruptcy on the one hand, and the default on the other, just a month ago, Argentina and its creditors began to negotiate. Deadline, July 30, when the payment of the 539 million dollars should have been made effective. It has not been possible. The Government of Cristina Fernandez blames the US justice (specifically, Judge Thomas Griesa) for not allowing the creditors to receive their payment, already deposited in the accounts of the New York Mellon bank .
“The money is there, obviously, if it were a default, it would not be there,” Minister Kicillof explained last night, adding that Argentina made a $ 1.031 billion turn last June 26 to avoid falling into default. However, the accounts are still blocked, which has led the South American Executive to state that ” the vultures and the speculators always win, it is the people who always lose”.
The solution: private banking
The solution is for the Argentine bank to assume the debt, although this measure could devalue the peso and restrict the credit. Now, the solution that the Argentine authorities devise is to negotiate with Argentine banks (integrated in the Adeba employers) the purchase of those bonds paying in full the amounts owed . These national banks, on the other hand, would have to admit a total or partial elimination of that debt, so the Argentine public accounts would not, in theory, be so affected.
This “innovative” solution, in the opinion of Javier Santacruz, is one of the worst possible, since it will cause a devaluation of the peso and, therefore, an increase in inflation , which is already one of the highest in the world. “They have advanced, because although it is the same as always [a default ] they have managed to do with financial innovation,” he explains.
The third ‘default’ in 30 years
As Bankinter market analysts point out in a recent market report, the risk of a new default is “the third case of default in the last 30 years” , although in this case it would be less serious than the one suffered in 20o2. its smaller scope. This low historical reliability explains that for agencies such as S & P and investment funds such as Blackrock Argentina is one of the most risky countries to invest.
Consequences: Weight devaluation
As the Bankinter analysts point out, this new default, despite its limited scope, will foreseeably cause a new outflow of capital , which in turn will trigger “higher inflation and worsening of the recession”. To these problems it would be necessary to add that, if Argentina’s banks finally stay with these bonds, in the event of a final default this could restrict credit and investment, as well as having a negative impact on the assets of the entities, as indicated the Argentine economist Alberto Martín.
Another consequence is related to the operation, from now on, of the sovereign debt markets. The interpretation given as of now to cases of public debt defaults will be strongly conditioned by the new US jurisprudence. ” This has been a US bomb to the global economic system, ” Nobel laureate economist Joseph Stiglitz explained in The New York Times , for whom the scope of this explosion is still difficult to quantify.
Is there another solution?
As reflected in the European think tank Bruegel, two alternative routes for Argentina would have been opened. One is that the government offers to pay the amounts owed to the restructured bondholders to the New York Mellon bank (the one in charge of making the transactions), but that the latter refuses to make the payments. In this way, Argentina would not have paid anyone, but neither would have denied payment to anyone. Another scenario would be to go back to the US justice system and re-litigate the specific aspect of the obligation to pay some creditors before others.
Financial sources consulted by this newspaper also point to a possible solution related to the International Monetary Fund (IMF), which would intervene in the sense of granting financial aid to Argentina with which to be able to face all its payments.