September 18, 2014
Under the volcano
Now that Argentina has committed itself to the path of negotiations with all creditors, albeit in a highly volatile atmosphere, the worst thing anybody can do is to make apocalyptic predictions running entirely counter to the spirit of dialogue. Starting with the worst-case scenario, a technical default now can in no way be compared to late 2001 when that d-word was so irresponsibly used by the caretaker president Adolfo Rodríguez Saá — Argentina’s banking system is not dollarized as it was then with thousands of savers panic-stricken over the future of fixed-term deposits in dollars but operates its transactions normally in the national currency (even if an excess of pesos and lack of dollars are much of the problem) and would continue to do so in any event. That is looking at the glass half-full — for those on the outlook for the half-empty, a technical default would not do that much to aggravate the underlying problem of Argentina’s isolation from global financial markets and investment but obviously would not help solve it either.
The government’s decision to deposit 832 million dollars towards Monday’s bond payment deadline has drawn various interpretations from its critics ranging from an act of defiance to a back-door deal with holdout creditors but what it basically does is to toss the ball into New York judge Thomas Griesa’s court — challenging him not to impound the funds on behalf of the holdouts and to restore the stay (so far refused by Griesa) now that this concrete goodwill gesture has been made. And indeed although Griesa has been elevated into something of a deus ex machina in much of the coverage of this issue (and although the endorsement of his jurisdiction by the United States Supreme Court sparked this latest chapter of the debt crisis), he is not as omnipotent as often portrayed — according to most interpretations of US law, he cannot transfer funds earmarked for creditors accepting the 2005 and 2010 haircuts to a minority of holdout litigants at will and any such decision could surely be appealed. The government is still between a rock and a hard place (confront the “vulture funds” and there will be blood — cut a deal with them and there will be a political scandal and a welter of litigation from other creditors) but the apocalyptic forecasts remain out of order.
Last but not least, there are grounds for optimism concerning national consensus here — not necessarily because Argentina has a statesmanlike opposition but, for example, City Mayor Mauricio Macri has just launched an 890-million-dollar bond for public works and is in much the same boat.