Resistance from Chaco

Only last Wednesday the province of Chaco blacked out the Argentina-Brazil soccer derby — just two days later the same province dimmed the lights on almost as important a front, Argentina’s financial credibility, when it paid off two dollar-denominated bonds in pesos. The sum in question (263,000 dollars) is tiny but the precedent huge — according to the worst-case scenarios of overseas investors, this spells virtual default if hard-currency debts can thus be redeemed by printing as many unbacked pesos as needed (along the lines of Gustav Stresemann’s “fulfillment” policy 90 years ago when he started paying off Germany’s unpayable First World War reparations with hyperinflation).

This worst-case scenario does not necessarily apply but is bad enough with some two-thirds of dollar-denominated bonds (including the provinces of Córdoba, Formosa and Tucumán) falling into this twilight zone of being in a foreign currency but under Argentine law. Chaco could always plead the sheer physical impossibility of obtaining dollars to service the bonds amid the ongoing currency curbs (even if everybody else had always found the greenbacks until now) as well as a provincial administration’s duty to submit to superior national guidelines — not only the (withheld) Central Bank authorization of greenback purchases but the avowed general intention to “pesofy” the Argentine economy. Yet Chaco Governor Jorge Capitanich is so closely aligned to the Cristina Fernández de Kirchner administration (as his hosting that thwarted soccer international perhaps indicates) that overseas investors are bound to suspect this initiative of being a trial balloon for a general compulsory pesofication of all debt — the more so after yesterday’s efforts by Buenos Aires Lieutenant-Governor Gabriel Mariotto (always a CFK mouthpiece in La Plata) to prod Governor Daniel Scioli in the same direction. Nor is this a rush of blood after the Hugo Chávez victory in Venezuela, which the Chaco move preceded by two days.

If money markets are trembling now, it is the provinces undertaking this rash initiative who may ultimately suffer as they find themselves being cut off global markets. And not only the provinces — thus dollar-linked debt has been among the mechanisms proposed by a newly nationalized YPF to raise the huge capital sums needed to tap the vast Patagonian shale potential. And if the Argentine fiscal deficit is anywhere near as bad as reported by the International Monetary Fund (five percent of Gross Domestic Product), the liquidity of the entire CFK administration could enter into crisis.