July 25, 2014
#AnotherViewSaturday, June 21, 2014
Bond holdouts: They pull us back in
For The Herald
Country’s shift towards market-friendly policies at risk by US Supreme Court decision
In a memorable scene from The Godfather: Part III, Michael Corleone, the character played by Al Pacino, reflects on just how difficult it is to become a legitimate businessman after a lifetime of crime. “Just when I thought I was out... they pull me back in,” he says.
After a decade of ignoring the rules of international trade and finance, in favour of short-term domestic political gains, the Argentine government has run out of money and is trying to fix its relations with the world in order to obtain credit. It reached an agreement to pay Repsol for the expropriation of YPF and with the Paris Club on outstanding debt. However, just when it though it was out of financial pariah land, the US Supreme Court decision’s not to take the Argentine case has pulled it back in. The decision has left the country between a rock and a hard place, with an obligation to either pay the litigating funds, negotiate or default on its debt payments.
The government was attempting a return to the markets. Since Axel Kicillof and Juan Carlos Fábrega took over the Economy Ministry and the Central Bank, we have seen more pragmatism than ideology, in practice if not in words. As well as the monetary adjustment (the devaluation and interest rate hike) to stop the haemorrhaging of foreign reserves, they worked to fix outstanding debt problems. The first step in that direction was the agreement reached with Repsol over the nationalization of YPF. The administration then unveiled a new Consumer Price Index, which started with some credibility which was quickly lost (as it diverged from private estimates). It also showed its intention to negotiate the different pending issues at the World Bank’s International Centre for Settlement of Investment Disputes.
Maybe the biggest step in that direction was the agreement with the Paris Club. The administration agreed to pay U$9.7 billion in five to seven years, with an initial annual payment of US$1.1 billion, with an interest rate of between 3 percent and 4.5 percent depending on the final payments. This new, more rational approach from the administration was received with delight by the markets. They had, importantly, already began to rally in August, 2013, when the county’s primary elections made clear to most observers that re-election was out of the question and that Argentina was heading sooner or later — one way or another — toward more market-friendly policies.
And just when the country thought it was out, it was pulled back in. On Monday, the United States Supreme Court decided not to take the Argentine case against holdout bondholders and Judge Thomas Griesa’s decision thus now stands. The decision requires Argentina to pay a group of bondholders around US$1.5 billion in cash. This could rapidly, in turn, mean paying another US$15 billion (53 percent of foreign reserves) in claims from other holdout bondholders. Moreover, if Argentina pays, the holders of renegotiated debt could eventually ask (with uncertain legal outcomes) for equal treatment under the Rights Upon Future Offers (RUFO) clause. The RUFO clause expires at the end of the year, and is precisely the reason why Argentina wanted to delay the case.
On the brink
Despite a decade of economic growth and triumphalist discourse by the government, Argentina is once again on the brink of default. So far, the administration has sent mixed signals, and that may be part of a strategy. Argentina cannot voluntarily negotiate with the so-called ‘vulture‘ funds without triggering the RUFO clause but it could find a way if it is somehow compelled to by the US courts. The fact that both President Cristina Fernández de Kirchner, in her televised address, and Economy Minister Axel Kicillof, in his press conference and press release, failed to appeal to offer simplistic formulae is a good sign.
In other moments, we may have heard speeches aimed at internal consumption, but that was not the case this week.
What is of utmost importance right now is to avoid a new default. Indeed, a new default would increase uncertainty, deepen the dollar crunch, increase capital flight and add pressure to the official and parallel exchange rates. All of this would further hinder an already stagnant economy and destroy more jobs.
Clearly, Argentina faces this situation in part because of errors of the current government. In its more than 10 years in office, much more could have been done to normalize political and financial relations. Instead, Argentina dragged its feet over pending issues (CIADI, the Paris Club, the holdouts) and created new financial issues (Indec, Repsol, AFJP private pension funds, foreign exchange restrictions).
It also made some questionable political moves that surely did not help its case (the treatment received by former US president George W. Bush in Mar del Plata, the memorandum signed with Iran over the AMIA bombing, the detention of a US airplane by Foreign Minister Héctor Timerman, etc).
Now, though, it is not only this administration but the whole country that faces the possibility of a new default. Thus, what is important is to explore all the possible avenues for an agreement to help Argentina continue on this road towards normalizing its relationships with the rest of the world. If the administration continues on that track, it will certainly win the support of most political parties. On the positive side, Argentina has some flexibility because of its low debt-to-GDP ratio (only 17 percent net of intra-public sector debt). On the other hand, it has a high fiscal deficit and tarnished credibility.
Argentina is not a mafioso and neither is its government; but like Michael Corleone, it is having a tough time in convincing the world that it its ready to renounce a decade-worth of untrustworthy behavior. There are no short cuts to long-term sustainable development: we need a consistent development strategy, including a consistent foreign policy that embraces the opportunities that the world offers.
*Fundación Pensar (PRO)