Argentina – Another Default Looming?

Managing a coerced economy

Argentina has been frequently in the headlines of late, as it attempts to fend off the court challenges by the so-called 'hold-outs', i.e., investors who have not participated in the rather undignified 'debt restructuring' following the 2001 default. Most of the investors currently holding these bonds are activist 'vulture' funds, who are doing the world a great service by trying to prove that governments are not necessarily above the law when it comes to servicing and repaying their debt. At one point Elliott Capital Management even had an Argentine navy ship confiscated in Ghanaian waters, much to the chagrin of the Kirchner government. Normally, governments will quietly buy these 'pests' off, so as not to damage their standing with current lenders. However, Argentina with its crypto-fascist government and forever ruined reputation seems not to mind the risk.

According to the WSJ: 

“Worries that Argentina is inching closer to default sent the cost of insuring the country's government bonds to their highest level since November and pushed shares in its benchmark index lower.

The move followed remarks made by Argentina's lawyer in a U.S. appeals court hearing in New York on Wednesday, suggesting the government would choose to default if ordered to pay creditors who hadn't agreed to new terms for their debt resulting from the country's 2001 default. The cost to insure $10 million of Argentina's sovereign debt for one year rose to $6.6 million, the highest since the record $8.58 million set in November.

Argentina's Merval stock index fell 3.5% on Thursday, while the price of Argentina bonds due in 2017 fell to 71 cents to the dollar from 79 cents on Wednesday. Investors are no longer "complacent about the possibility of a sovereign default," said Gavan Nolan, credit analyst at Markit in London.

On Wednesday, Argentina asked the Second U.S. Circuit Court of Appeals to set aside a decision by U.S. District Judge Thomas Griesa last year that barred the country from making payments on its restructured debt unless it set aside additional funds for creditors who didn't participate in the restructuring. Judge Griesa awarded about $1.3 billion to a group that includes Elliott Management Corp.'s NML Capital Ltd. and Aurelius Capital Management LP.

U.S. Circuit Judge Reena Raggi questioned Argentina's lawyer, Jonathan Blackman, over the consequences should the court rule against the country. In response, Mr. Blackman said, "we would not voluntarily obey such an order." Analysts said his remarks imply Argentina would opt for default instead. After the hearing, Argentina Vice President Amado Boudou said: "It's not that Argentina won't pay. Argentina will always pay those who entered into the exchange. What Argentina won't do is break its own laws."

An adverse ruling could put Argentina in the position of either refusing to pay holdouts and defaulting on its bonds or paying holdouts and risk that investors who participated in debt restructurings in 2005 and 2010 would then sue the government for similar treatment. Argentina's next payment is due March 31. J.P. Morgan analysts said a ruling from the court is likely within about a month.”  (emphasis added)

There is of course a good reason why Argentina's government is prepared to risk a default: very few foreign lenders are lending it money anyway. This is due to the unpredictable and repressive economic policies the government pursues. Argentina's economy can probably be called a full-blown Zwangswirtschaft by now (literally: a 'coerced economy').