December 19, 2014
Keeping an open end
If the 2001 default was the chronicle of a death foretold, the possible technical default of an Argentina both able and willing to pay its debts seems bafflingly gratuitous in every way and one of its most puzzling aspects is how everything seems to revolve around one Manhattan district judge. How can the fate of nations hinge on a magistrate a couple of decades past the normal retirement age and appointed four decades ago by a president on the eve of disgrace due to the most famous political scandal in world history, even if his jurisdiction obeys previous contracts and has been upheld by the United States Supreme Court?
Two main alternatives present themselves to Judge Thomas Griesa’s apparently inexorable grip on Argentina’s debt destiny — there are such things as out-of-court settlements and the jurisdiction can always be changed (a possibility which a technical default in particular would open up). The vicious circle of the vulture funds rejecting a stay until there is a settlement and the government refusing to negotiate until Griesa restores the stay can be broken. However well these funds with nothing to lose may have covered themselves against default, they should not assume that they have lined up the perfect win-win situation, irrespective of whether this crisis has a soft landing or ends badly. The latter outcome would accelerate the battery of class action clauses already underway in debt restructuring worldwide to remove their future leverage while criticism of the destructive impact of these rogue outfits on the world economy is growing exponentially among pro-market observers. Not that the vultures are likely to see this big picture because that is the nature of the beast. Some analysts point out mechanisms to avoid the “rights upon future offers” clause bringing in other creditors — Griesa certifying the involuntary nature of the agreement, a postdated settlement, a proxy buying up the debt for a bond swap at a later date (something which earlier governments probably should have done themselves when this debt fell to junk bond levels in order to beat the vultures to their prey). However, nobody can guarantee against Griesa or some like-minded colleague reinterpreting whatever new mechanism emerges, thus adding a huge debt to the current balance by merely signing off on a sentence.
A default would undoubtedly be negative for an economy battling against recession but not catastrophic, given the country’s basic solvency — the upside would be demolishing the current highly unsatisfactory legal architecture of debt payment and starting again, instead of persisting with default. A highly risky path probably well worth avoiding but not entirely to be ruled out.