Is Ar­gentina at fault for de­fault?

Financial Mirror (Cyprus) - - FRONT PAGE -

On the sur­face, it would seem that Ar­gentina’s de­fault is the per­fect ex­am­ple of his­tory re­peat­ing it­self. Yet the coun­try’s Pres­i­dent, Cristina Fernán­dez, is in­sis­tent that the re­cent de­fault is un­like the pre­vi­ous ones and has ac­cused Amer­ica’s court rul­ing of un­nec­es­sar­ily es­ca­lat­ing the prob­lem. Although it is am­bigu­ous where the blame and re­spon­si­bil­ity lie, the cer­tainty re­mains that un­til a sat­is­fac­tory so­lu­tion is agreed upon, it will be the economies of Ar­gentina and Amer­ica that suf­fer, along with the bond hold­ers them­selves.

Here’s the low­down. Ar­gentina was due to make a pay­ment on bonds is­sued as par­tial com­pen­sa­tion to the vic­tims of its 2001 de­fault, and ac­cord­ingly, it trans­ferred the $539 mln owed to the banks ad­min­is­ter­ing the bonds. How­ever, a small mi­nor­ity of bond own­ers are un­happy with the 65% hair­cut that the re­struc­tur­ing in­volved, even though they orig­i­nally bought the bonds very cheaply af­ter Ar­gentina’s eco­nomic cri­sis of 2002. They have per­suaded the Amer­i­can court to block the pay­ment un­til Ar­gentina pays them back in full. Ar­gentina ac­cuses these own­ers of hold­ing the 92% who ac­cepted the re­struc­tur­ing to ran­som and of tak­ing ad­van­tage of their coun­try’s debt to make huge prof­its. It can­not af­ford to pay every­one in full and a clause pre­vents it of­fer­ing bet­ter terms to some bond own­ers than oth­ers. It says it had no choice but to de­fault.

Ar­gentina is right to be frus­trated by Amer­ica’s court rul­ing which has caused a greater fi­nan­cial dis­pute than orig­i­nally ex­isted. How­ever, it did have choices about how to re­act. Sev­eral own­ers of the re­struc­tured bonds have agreed to waive their rights to the full amount and it could have tried to per­suade oth­ers to fol­low suit. Lawyers have also of­fered loop­holes, sug­gest­ing that the equal treat­ment clause may not ap­ply given that Ar­gentina would be fol­low­ing a court order rather than act­ing vol­un­tar­ily.

By sim­ply defaulting, Ar­gentina looks un­trust­wor­thy yet again, and it is pay­ing an eco­nomic price. It is un­likely that the coun­try will suf­fer a post-de­fault re­ces­sion like last time, but the mar­kets are still re­act­ing. The Mer­val In­dex was down 6.7% on its worst day last Thurs­day. In­ter­est rates are likely to rise caus­ing a se­ries of dis­rup­tions to the econ­omy and pop­u­la­tion, and for­eign in­vestors will be de­terred.

Com­bined with other geopo­lit­i­cal head­lines, in par­tic­u­lar the threat of sanc­tions against Rus­sia, the Ar­gen­tinian de­fault has un­set­tled the U.S. mar­kets and led in­vestors to lock in gains and sell off. U.S. stocks are now down for the month and the Dow Jones in­dex has lost more than 200 points. On Fri­day, the S&P 500 posted its largest weekly de­cline since 2012.

Cur­rently, there is no res­o­lu­tion, de­spite the at­tempts of a num­ber of pri­vate par­ties and in­vest­ment banks to me­di­ate.

Ar­gentina has said that it will take the case to the In­ter­na­tional Court of Jus­tice in The Hague. So long as bond­hold­ers do not de­mand im­me­di­ate pay­ment, the mar­ket im­pact may steady and buy the coun­try time. Yet if the cen­tral bank re­serves dwin­dle, econ­o­mists ex­pect that Ar­gentina will be pres­sured to ac­cept a quick deal.

In­vestors seek­ing a res­o­lu­tion to the cri­sis are surely hop­ing that at some point soon, Fernán­dez’ na­tional pride will give way to eco­nomic re­al­ity.

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