November 24, 2014
Life after the default
However gratuitous some of the rhetoric, there seems to be a widespread consensus that the government really had no alternatives to entering into a “selective default” on Wednesday — without minimizing its adverse consequences in any way, “a typhoon is always preferable to a tsunami,” in the words of opposition economist and ex-minister Roberto Lavagna. Caught between an incomprehensible New York court ruling blocking payments to creditors and the RUFO “Rights Upon Future Offers” clause threatening to escalate the liabilities in litigation 100 times, the Cristina Fernández de Kirchner administration had no way out of this uncharted legal territory. As it happens, this consensus also translates into a surge in popular support for CFK which can only steel resolve. Indeed while repudiation of the destructive vulture funds is almost unanimous, there are even broad sectors of grass-roots public opinion who are not unduly distressed over the prospect of being unable to service the legitimate creditors accepting government terms whom the CFK administration is still religiously committed to paying — if the money does not leave the country on their behalf, then it can only remain here for the national benefit, runs their reasoning.
While the impossibility of evading “selective default” is thus absolutely clearcut, there remain important grey areas in the co-ordination between the public and private sectors which need clarifying. In hindsight, it seems that last week’s bids for an out-of-court settlement not exposing the Argentine state to the RUFO clause were basically the initiative of a banking sector anxious to avoid financial instability above all else (even if there may have been last-minute covert government support). While sparking blind market optimism in the first half of the week, these efforts were often confusing, apart from lacking the time to master the intricate details involved — thus what began as mustering a quarter billion dollars for an escrow account on vulture fund behalf mushroomed without any real explanation into buying out all their bond claims at seven times the cost. These efforts are now in abeyance due to such confusion and also discouraging messages from Thursday’s government rhetoric but they are still alive — Economy Minister Axel Kicillof left a door open when he said: “The government would not oppose an agreement between private parties” as long as it did not require public money either now or in the future.
Depending on the success in reviving such efforts, probably the weirdest default in world history could also be its shortest. Or not.