September 18, 2014
Supreme crisis III
The government blows hot and cold on default with already three clear shifts in reaction between Monday’s adverse United States Supreme Court decision and midweek — and the markets love it. The initial sharp reaction was followed by a stress on seeking a negotiated solution, only for new threats of default to emerge from an Economy Ministry statement on Wednesday evening and the markets moved up and down in accordance with people just as skilled at making money from the down side as the up.
The reasons for the new escalation probably have less to do with any verbal fireworks between Thomas Griesa and Cristina Fernández de Kirchner (i.e. between an irate judge of a Manhattan district and the elected president of an independent nation, we should not forget) or even a negotiating strategy than with the stay on the New York litigation being lifted that same day because for a couple of years the battle with the holdout hedge funds has been all about buying time which is at a premium and the deadlines have suddenly become much shorter. The next payment to the creditors within the existing bond swap falls due at the end of the month and even if a rehearing at the US Supreme Court (not requested on Monday precisely because it would automatically end the stay which has now been lifted anyway) would only put off the moment of truth for a maximum of 25 days. This lack of time complicates every solution, whether good or bad. If it is generally agreed that a negotiated solution is the only rational outcome, negotiations by definition are never a matter of simple yes/no dialogue but take their time. All the empty discourse from the opposition calling for “dialogue” should also explain what to negotiate and the consequences. Meanwhile the more extreme solution of a new bond swap under Argentine jurisdiction faces serious difficulties because the 85 percent acceptance assumed to be the minimum for any viability could never be mustered in a short time.
Yet bonds remain the strongest basis for averting default because, counter to a widespread perception, the hedge funds’ insistence on full payment need not be equated with cash down — on the contrary, they might well find bonds with the huge margins between the various ways of evaluating them more interesting than a simple cash sum (it should not be forgotten that they secured their current stranglehold in the first place by buying up Argentine liabilities cheap when they had become junk bonds and then holding them to their face value). What should not be under any discussion — and least of all after the 2001-2 experience — is that a default of any description is a general disaster which should somehow be avoided. A disaster that could only be worsened if Argentine foreign debt escalated to the levels of 14 years ago.