November 22, 2014
Looking beyond default
If Argentina is indeed heading inexorably towards a technical default this week, as the markets are now expecting (although their current pessimism could just as easily be as off-target as their previous optimism), this would also have its advantages in ending an unsatisfactory legal architecture for debt repayment and even going beyond the “non-rational” environment that prevails on Thomas Griesa’s court, according several pundits based on US have pointed out in last weeks. But in that event the government should also start telling us almost immediately how it proposes to head off the negative consequences (or at least make preparations). In a contest to see who blinks first, nobody has batted an eyelid so far but that could always change at the last minute — the vulture funds could ask Manhattan judge Thomas Griesa to restore the stay requested by Argentina in order to avert a crisis sending everything back to square one or the ineffable jugde might take that step on his own initiative or perhaps the Cristina Fernández de Kirchner administration might offer the escrow account demanded by the vulture funds as their condition for recommending a stay, facing the huge risk of firing the catastrophic RUFO clause that would multiply several times the Argentine foreign debt.
Should none of these things happen (as is more than possible), then Argentina should brace itself for consequences which should neither be overestimated nor underestimated. In the immediate term, nothing too much would happen to change an economy which already has more than its fair share of downhill trends nor to impact the world at large (if only because Argentina has been off global bond markets for so many years). Yet there would definitely be collateral damage — starting with a substantial devaluation which was already experienced at the start of this year. The government coped with the summer devaluation very effectively by sharply hiking interest rates, restoring stability by March, but at the price of a slowdown which has started coming home in recent weeks and which is probably the main problem, despite all the protagonism given to the technical default brinkmanship. Nor is soy coming to the rescue this time with its export prices slumping — not because of any failure but because of bumper harvests in the United States, Brazil and here alike, leading to the perfectly natural consequences of the laws of supply and demand.
Such problems will require rather more counteraction than speeches about a “won decade” which already ended last year and whose main economic successes were probably in its first half.