October 21, 2014
This WeekSunday, July 20, 2014
No A in BRICS
B is for Brazil. R is for Russia. I is for India. C is for China. S is for South Africa. It spells BRICS. There is no A for Argentina in that acronym. Will there ever be a BRICSA? Who knows. But there was a lot of speculation ahead of the BRICS summit in Brazil because Argentina has been invited to take part along with other Latin American nations to the second day of the talks on Wednesday.
The BRICS summit was formally held on Tuesday. The hype about Argentina formally joining BRICS, now you know, was slightly warped. The buzz was prompted by a recent meeting between the foreign ministers of Argentina and Russia. But Russian President Vladimir Putin, who visited Buenos Aires briefly last Saturday, put things in perspective when he declared that there were no immediate plans to expand the group of emerging economies.
BRICS nations are busy with BRICS issues. Argentina will have to wait.
On Tuesday the official announcements in Fortaleza, Brazil included a new BRICS development bank that will initially hold 50 billion dollars. BRICS leaders have also created an emergency reserve fund worth 100 billion dollars. That’s a lot of dollars. Everybody knows that Argentina is thirsty for dollars. So one of the questions fielded by Brazilian President Dilma Rousseff was if the new BRICS bank will lend Argentina some cash. No, she said, because Argentina is not a BRICS member. How about the emergency reserve fund? Will there be money going in Argentina’s direction from there? Maybe, said Rousseff. We’ll see if and when Argentina makes a formal request.
Concern was also voiced at the BRICS summit about the pending reforms to the International Monetary Fund (IMF) and other lending institutions.
It was in this context that President Cristina Fernández de Kirchner arrived in Brasilia to address the BRICS summit with Latin American nations. B is for Brazil. R is for Russia. I is for India... you know the rest. Is D for default?
Argentina has been getting a lot of sympathy in international forums for its legal battle in a New York court with the holdout creditors who did not accept the swaps launched in 2005 and 2010 (on 100 billion dollars worth of sovereign debt Argentina defaulted on in 2001).
The sympathy was also there when Fernández de Kirchner gave her speech in Brasilia. But this will not change the fact that a New York district judge, Thomas Griesa, has already ruled in favour of paying the vultures 1.5 billion dollars worth of Argentine debt bonds.
There is a lot of suspense attached to the legal case because Argentina must make a coupon payment worth 539 million dollars to the bondholders who did accept the swaps by July 30. That’s two weeks from now — not a lot of time to decide the destiny of a lot of money.
The US hedge funds that took Argentina to court, also known as “the vultures,” are not happy. They are more like furious. Griesa has named a mediator, grandly named the Special Master, with the mission of hammering out a settlement. But the vultures accuse Argentina of not wanting to negotiate while the clock ticks. Not so, Fernández de Kirchner told the BRICS summit.
Argentina, she said, is willing to negotiate. The president added that Argentina will not default because it has consistently paid its debt to the bondholders who agreed to the haircuts of 2005 and 2010.
Fernández de Kirchner reminded the world that Argentina had already deposited 539 million dollars for the coupon payment (in the he Bank of New York Mellon). The president also said that Argentina’s recommendation to the vultures is that they also accept the terms of those swaps made in the past decade. That, she said, is Argentina’s offer.
Griesa has a delicate financial matter in his hands. The judge has called a hearing for Tuesday to clarify aspects of his decision to banks, vultures, and bondholders. Argentina has meanwhile urged the judge to slap a stay on the ruling so it can have more time to negotiate with the holdouts.
The conflict is not only just about those 1.5 billion dollars that is making the vultures salivate. Other holdouts who did not accept the swaps could also now file similar lawsuits, meaning that eventually Argentina might have to cough up 15 billion dollars. Then the creditors who accepted the swaps, according to a clause, could have the right to demand the same terms as won by the vultures in the court of New York. Yep, everyone is in it for the money.
Fernández de Kirchner declared as much in Brazil. Everybody was trying to figure out what the president’s words meant. At face value she declared that Argentina will not default. But some observers underlined that she could be in fact saying exactly the opposite.
Griesa has not allowed those 539 million dollars to be paid out because his ruling in favour of the vultures currently stands. Still, even after the ruling against it, Argentina is not blinking.
All eyes will be on the hearing called by Griesa for Tuesday. But Argentina’s strategy could, potentially, lead to the eighth default in its turbulent political and financial history. Initially this specific potential default was being described as “technical.” Yet now the critics are saying that Argentina is close to another good old fashioned default (with no adjectives attached).
The suspense will not go away until July 30. It’s a fascinating case of 21st century financial warfare. The private funds are making a republic hurt. The judge up in New York could not care less about states, borders and frontiers. Meanwhile, back in Argentina, the economy is creaking.
This year will go down as one of the first in which salaries are losing out to inflation. The news is being amply reported. Since 2003 salary hikes most years (perhaps not in 2009) overtook the annual inflation rate.
The state-run statistics bureau INDEC on Tuesday reported an inflation rate of 1.3 percent for June. Inflation is technically slowing down. But it has increased a whopping 15 percent in the first half of this year, according to INDEC. Opposition lawmakers insist that inflation, despite INDEC having made changes at the start of this year to meet IMF standards, is even higher. The opposition said June’s inflation rate clocked in at 2.2 percent. The controversy will rage on. But this year, with the auto industry especially hurting, there will be no economic growth.
Labour unrest is latent. The anti-government unions could call a general strike next month. Even the pro-government trade union factions are demanding income tax breaks and mumbling complaints about suspensions.
Tension is in the air. Argentina’s World Cup squad returned from Brazil on Monday after having reached the final and losing it 1-0 to Germany. Thousands gathered in downtown Buenos Aires to greet the team. But ugly violence broke out when fans clashed with police. The players, after arriving at Ezeiza airport, issued a statement saying that they had decided to stay away from the celebrations because their safety could not be guaranteed. Workers protesting dismissals and suspensions have also clashed with police recently. Salaries losing out to inflation will not make the second half of the year any simpler for the CFK administration.
Griesa’s July 30 deadline will could just come and go. But Argentina will still be in need of dollars regardless of how the vulture saga plays out. Anybody willing to lend a helping hand? Yes, that big C in the BRICS acronym: China.
Chinese President Xi Jinping met with Fernández de Kirchner in Buenos Aires on Friday to sign 20 accords. Ties between Argentina and China have now been upgraded to an “integrated strategic association.” The vultures might be in it for the money. China in it for the infrastructure.
China has offered a loan of 4.2 billion dollars for Argentina to develop two hydroelectric dams in Santa Cruz province. Another loan worth 2.1 billion dollars will be injected to improve the Belgrano Cargas freight train line. (In other words: China is investing for grains to be swiftly transported from plains to ports.)
There’s more. A currency swap operation of 11 billion dollars was approved by the central banks of Argentina and China. The deal could help Argentina boost its Central Bank reserves (they currently stand at about 30 billion dollars). The agreement will also allow Argentina to pay for Chinese imports with the yuan currency.
Even when there is no A yet affixed to the BRICS acronym, Argentina has found more than just sympathy from the world’s large emerging economies.
Will this be enough to calm Argentina’s financial anxiety? There’s other anxieties gripping the nation. There is, for one, institutional anxiety. Critics have complained about the impeachment proceedings waged against suspended prosecutor José María Campagnoli. Campagnoli’s superiors say that he overshot his authority when he investigated leads in connection with corruption allegations involving the Kirchnerite businessman Lázaro Báez. To his supporters Campagnoli is a hero who is standing up to the Kirchnerite administration even when subjected to an impeachment over disciplinary matters.
The news is that Campagnoli was reinstated as prosecutor on Thursday after a 4-3 vote by the impeachment jury. The decision was celebrated by the opposition leaders. But Campagnoli’s camp has only won a battle. New impeachment proceedings have opened against Campagnoli and a preliminary hearing will be held on August 5.