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Argentine President Cristina Fernandez with Cabinet Chief Jorge Capitanich (left) and Economy Minister Axel Kicillof (right). (Photo: Government of Argentina)
Thursday, July 31, 2014

Argentina’s Debt Farce

Argentina wasted 19 months to avoid a default and cements its image as an unreliable country for business.


You know something is wrong when Argentina’s cabinet chief calls a US court appointed mediator “incompetent.” Something wrong not with the mediator, but the Argentine government.

The comments by cabinet chief Jorge Capitanich came after Argentina failed to reach an agreement with holdouts despite ample time and opportunity to do so.

Argentina in 2001 defaulted on its foreign debt and in 2005 reached an agreement with most of its creditors who accepted a cut on their payment. However, a group of holdouts sued for full payment of $1.33 billion plus interest.

In November 2012,
US Federal Judge Thomas Griesa ruled in their favor. However, Argentina proceeded to waste the past 19 months with various legal maneuvers. 

First, it sought to delay the ruling by appealing to the US Supreme Court. When that court on June 16 this year upheld Griesa’s ruling, Argentina then wasted another six weeks on various legal moves and delay tactics.

After the Supreme Court ruling, the government seemed lost. Initially, Argentine Economy Minister Axel Kicillof said the country would seek to skirt the U.S. ruling by moving its overseas bonds into the local market, a move that Griesa said on June 18 would be illegal, according to Bloomberg. 

On June 19, Kicillof said he would meet with the holdouts in New York the following week.

However, on June 23, Argentina asked Griesa to issue a stay of his ruling. Meanwhile, Griesa himself didn’t waste any time in trying to reach a solution and appointed Daniel Pollack, the managing partner of McCarter & English LLP in New York, to mediate the stalemate between Argentine and the holdouts.

But Argentina opted to waste more time. On June 26 it defied Griesa and deposited $539 million in BNY Mellon in New York to pay bondholders that had accepted its 2005 deal. On June 27, Griesa blocked the payment to those bondholders until Argentina reached an agreement with the holdouts.

Then on July 21 Argentina again asked Griesa for a stay. He rejected the stay the very next day and ordered the parties to meet "continuously" with Pollack after nearly a month of no further progress in mediation.

In a sense, the July 22 order by Griesa to “constantly” meet with the holdouts was Argentina’s last chance to show it was serious. Those eight days would have been enough to reach an agreement if Argentina had shown even a remote interest in doing so.

However, with the clock ticking, Argentina again started with its delay tactics.

Pollack, like Griesa, moved swiftly and called for a meeting the next day – July 23. A lead holdout creditor, Elliott Management's NML Capital Ltd, said in a statement it was prepared to meet with Pollack to resolve the dispute, according to Reuters

"We are confident this matter could be resolved quickly if Argentina would join us in settlement discussions," NML said.

But on July 25, Bloomberg reported that Argentina refused to meet directly with the holdouts to avoid a default. Just as important, they hardly spent any time with Pollack in their fourth meeting with him since he was appointed in June.

This week was the crucial moment to show whether Argentina really wanted to avoid a default or not. It started promising, with Capitanich saying on Monday that the government would make another effort to reach a deal and that a delegation would fly to New York on Tuesday.

The delegation was originally led by Finance Secretary Pablo Lopez, but Kicillof joined the talks later and hopes grew when the parties held talks until late Tuesday before announcing further talks Wednesday.

However, Wednesday evening the talks ended without any deal. Argentina would miss the midnight deadline and be in default.

NML said in a statement that Pollack had proposed several solutions that the holdouts would accept, but that all were rejected by Argentina in favor of a default, according to Argentine newspaper La Nacion

So, now Argentina faces its second debt default since 2001.

To top it off, Argentina’s government is insisting there is no default.  

Despite the clear benefits of a settlement and the clear disadvantages of default, Argentina opted for the latter. One explanation is that President Cristina Kirchner is betting that its strategy will garner it more support than protests.

Walter Molano, head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development, says the Argentine government is laying the ground for Kicillof's presidential candidacy.

“Yesterday's speech… could be construed as the opening salvo for his election campaign,” Molano said in a commentary today. “This would be a God-send for Cristina and her crew. It would keep her arm of the PJ (Peronist party) in power and keep her out of jail.”

He believes there will not be street protests of the type Argentina saw after its last default. “This is not a repeat of 2002, “ Molano says. “Life in Buenos Aires goes on as normal. The ATMs are working, credit cards are functioning, and life is good. Therefore, don’t expect people to take to the streets in protest.”

However, the default will clearly hurt Argentina.

A default will lead to higher inflation, a weaker peso and a deterrent to potential foreign investors, argues Claudio Loser, a former Director of the Western Hemisphere Department of the IMF who is President of Centennial Group Latin America and a Visiting Senior Fellow of the Inter-American Dialogue. (See Argentina Debt Default: The Real Cost)

Argentina’s economy will likely contract by 2 percent this year (twice the 1 percent decline originally estimated before the default), according to Bulltick estimates quoted by Reuters.

Contrary to speculation that Kirchner wanted to leave the house in order when her mandate ends late next year (so she can run for governor of Buenos Aires), she again made a choice that will hurt Argentina’s economy.  

Prior to the default, her administration can boast of providing false inflation statistics, imposing protectionist trade policies and nationalizing the oil company YPF and private pension funds to the clear detriment of both.

With the new default, Argentina has further cemented its image as an unreliable country for business.  

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