November 28, 2014
Default in the air
A roller-coaster month leading to yesterday’s deadline seemed to end in the grim (and likely evanescent) certainty of default — if that is the right term for a government not only expressing the will to honour debt but depositing money on behalf of its creditors in the bank. The day began hopefully on the back of Tuesday’s bullish markets seeing light at the end of the tunnel on the basis of insistent reports that Argentine private banks would act as a proxy to set up an escrow account on behalf of holdout creditors — not only saving the Cristina Fernández de Kirchner administration’s face after its rhetoric against the vulture funds but, rather more importantly, preventing any direct state payment from triggering the RUFO “rights upon future offers” clause reviving the claims of the vast majority of creditors who had accepted the 2005 and 2010 haircuts. Economy Minister Axel Kicillof would not have flown to New York to announce a failure, it was further reasoned, leading to rising hopes of a happy end. Yet Manhattan judge Thomas Griesa was inexplicably silent in the course of yesterday. Even though Kicillof’s acceptance of dialogue with the vulture funds and the potential escrow was widely seen as more than enough progress to justify a renewed stay (whose absence is the immediate cause of the return to deadlock) while Kicillof was all too vocal yesterday evening in spelling out how the vulture funds and Griesa between them had blocked all possibilities.
The Argentine bank initiative (to which Kicillof gave extremely short shrift yesterday) thus seemed born out of their sectorial self-interest and apprehension over the impact of any default on financial stability. Perhaps they waited too long for somebody else to come to the rescue and buy out the vulture funds, thus allowing too little time for their proposal to beat the deadline, but the gulf described by Kicillof yesterday was too wide. Yet last night optimism seemed to return that the bank bid to reach agreement was still alive with the minister’s words more designed to shield the state from RUFO claims than to burn bridges.
Now is thus too early to draw conclusions about the scale and impact of the looming default, which has been overdramatized on various sides from the start (with nothing in common with the 2001-2 crisis save the D-word). Even without creating new problems, it would be bound to complicate existing ones but the alternatives are still in the air.