November 23, 2014
Default by default
For the first time this month markets will not be opening today after a week in which they displayed total confidence that there would be no technical default come July 30, whatever the fireworks over the issue. That confidence had been based on the government’s track record of settling other obligations (Repsol, the Paris Club, etc.) over half a year and on the belief that where there is a will, there is a way — that Argentina’s need to avoid a default was so acute that some mechanism would be found (for example, paying off vulture creditors with the equivalent of a postdated cheque or future bonds to avoid the “rights upon future offers” clause).
Yet that market confidence began to waver in midweek — no doubt in the face of the firmness of President Cristina Fernández de Kirchner’s defiant speech to the BRICS summit. There her tone was not so much that Argentina would not pay as that Argentina had already paid (remitting the corresponding deposit to New York at the end of last month, which was immediately frozen by Manhattan judge Thomas Griesa) — she further argued that the existing 2005 and 2010 bond swaps favoured holdout creditors because even a starting 70 percent haircut would later permit them profits trebling the outlay on debt bought at junk bond levels of 10 percent. CFK also seemed to assume that there could be no default without one being declared by the government in question and she herself had no intention of taking such a step herself, ergo no chance of default. The substance of this speech hardly differed from her Flag Day declaration of a willingness to “pay 100 percent of bondholders,” a pledge prompting the market optimism until recently, but the change of tone has prompted uncertainty.
This uncertainty will continue at least until tomorrow when the next meeting in Griesa’s offices is due. At least two things could occur then to ease the jitters — that the CFK administration shows a more decisive engagement with sooner or later paying to vultures or that Griesa restores a stay over his ruling favouring the holdouts. Either breakthrough is possible — the government’s vague hopes of alternative BRICS financing were not fulfilled for the immediate term in Brazil while the vultures could be swayed by the government’s argument that restoring the stay also serves their interests by unblocking the talks, assuming they really want to be paid now instead of enforcing their credit-default swaps, something widely beleived in Wall Street. But tomorrow will be only eight days away from the deadline and the clock is ticking.