May 23, 2013
The plight of the training frigateLibertad stuck in Ghana for the last 10 days thanks to a creditor injunction is grabbing international headlines but the main problem remains the shadow of pesofication hanging over provincial dollar debt. The marooned cadet vessel is an exotic episode which shows up the Foreign and Defence Ministries as not having done their homework, underlining that it does not suffice to steer clear of Paris Club countries in order to avoid the consequences of the 2001 default. But the provincial credit crisis is more serious because it is not merely due to carelessness (even though this is also a factor) — slamming the door on provincial borrowing abroad increases the dependence of governors on central government largesse as an election year draws ever closer.
Chaco’s abrupt decision last week to pay two minor dollar debts in pesos was surprising because it ran counter to all previous trends — just a couple of months ago the Cristina Fernández de Kirchner administration had turned August 3 into almost as huge a red-letter day as the forthcoming “7-D/10-D” for the final payment of the Boden 12 bonds in full while the 2013 budget (whizzed through the Lower House with a 142-87 vote on Thursday) generously earmarks Central Bank reserves to ensure debt payments in the appropriate currency. Never underestimate sheer incompetence as the source of such contradictions — either in general or for the reactions of Buenos Aires province Lieutenant-Governor Gabriel Mariotto in particular. The reasons behind Mariotto’s contradictions (urging Buenos Aires Governor Daniel Scioli to take the Chaco road on Wednesday and claiming to have been misquoted by the press the next day) are an enigma inviting fertile speculation. His Wednesday outburst may have been sloppy — not immediately realizing that whereas Chaco bonds inhabit that twilight zone between being payable in foreign currency and subject to Argentine law, Buenos Aires province dollar loans are protected by overseas law — or it could have been malicious, creating a cloud of uncertainty around Scioli’s foreign financing in order to deepen his dependence on CFK.
Either way such strategy is foolish — bad enough if merely careless but positively suicidal if deliberately designed to weaken the provinces because CFK ultimately pays the political and economic cost of her nation’s blighted credibility with no need to travel as far afield as Ghana to discern the consequences of Argentina’s rising country risk.