November 26, 2014
Default on real economy
Confrontation may not even be politically decisive
If President Cristina Fernández de Kirchner’s rhetoric projects her as a local version of Hamas drawing missiles and bombs from the outside world, the real scenario is somewhat less extreme. Not only is she far from alone in the world but her tortuously semantic denials of default even seem to be echoed by the markets — not at the same verbal level but numerically.
Much as CFK and Economy Minister Axel Kicillof might hate it, the “d-word” has been accepted by the entire planet from Wall Street to China. It’s a big, big world, as well as a busy and complex one — the markets simply do not have the time to analyze the subtleties of Argentina’s selective or technical default or to seek the new term demanded by CFK to cover this anomalous conundrum.
But when it comes to the numbers, the markets move much closer to CFK’s default denial (or at least scepticism) since such key indicators as country risk and bond values have been nowhere near the catastrophic falls implied by that term (yet another contrast with the 2001-2 meltdown). After a full week of default, country risk has climbed by under 30 percent to some 730 points when it should have entered four digits after such a drastic step while the “blue” dollar (whose colour perhaps stems from its tendency to reach for the sky at times in the past) is below 13 pesos, leaving the gap with the official exchange rate not much over an almost normal 50 percent. Sharp increases but nobody is falling off a cliff.
This relatively soft landing for country risk and bond values has not been shared by many Argentine companies (especially banks and utilities) with steep falls on Wall Street this week but perhaps this only reinforces the point that the problem is not so much default as the real economy.
Since the markets do not have the time or inclination to enter into CFK’s semantic reasoning, what are their motives for downpedalling default?
Do they understand a limited default centred on a relatively tiny sum of well under US$2 billion as having extremely short legs, being sure to expire at the end of the year along with the RUFO (Rights Upon Future Offers) clause extending any agreement to all other creditors — or perhaps even sooner if the world of high finance can unblock this situation in its own interest by buying out the bonds held by the vulture funds or at least creating an escrow account to permit a stay (little headway on that front this week with Argentine banks now backing away from such efforts in the face of official discouragement but a Big Four of international institutions have picked up the baton)?
Or do the markets feel that the default could last somewhat longer until the end of next year (since the CFK administration has pledged itself to offering the vulture funds the same haircut as all the other creditors, even without RUFO) but are prepared to wait because they are so sure that the need for investment will force the next government into the necessary flexibility to reach agreement? Always assuming that the problems for provincial solvency posed by the default do not prompt a revolt within ruling party ranks much sooner.
There is also a more cynical explanation for this relative indifference to default — that Argentina’s long absence from global capital markets minimizes its impact elsewhere. Which leaves us with the melancholy conclusion that Argentina needs the world rather more than the world needs Argentina. A conclusion placing the ball very much in the court of a government which believes that playing for time is the name of the game. And which finds the political dividends of grandstanding against the vulture funds much more immediate than the investment windfalls from that long march back to global credit markets beginning with the settlements with Repsol, the Paris Club, etc. and at a dead end for now.
But enough about default because it is overrated. If averting or blundering into default were the difference between heaven and hell, then those urging a settlement with the vulture funds at any price would be right. But this columnist is inclined to agree with those opposition voices who consider that, whatever the excesses of its rhetoric, the government had no real alternative to this default in the face of a Manhattan court ruling interrupting a chain of repayment established over a period of between five and nine years (an opinion shared, incidentally by a clear majority of international market analysts).
Various experts have already estimated the likely impact of default on key indicators such as inflation, unemployment, the balance of trade, etc. Most of those independent consultants feeding the Congress index of inflation have this year’s inflation at just below 40 percent while the post-default estimate of at least a couple of them is 42 percent. Again unemployment (7.1 percent in the first quarter of the year, according to INDEC statistics bureau) was thought by these same consultants to be rising to 9.5 percent as economic slowdown moves towards zero growth — default extrapolates this figures to 10.6 percent. Default knocks down to US$5.6 billion a trade surplus already shrinking from US$8 to US$6.5 billion (and,so on).
On this basis default really does not make that much of a difference. Regardless of whether this year’s inflation ends up at 39 pr 42 percent, unemployment 9.5 or 10.6 percent, the trade surplus down by US$1.5 or 2.6 billion, etc. any government will face problems. And if these wounds are allowed to fester, then the evils of the vulture funds will start looking rather abstract — Kicillof should take note.
Especially when most of these problems are the government’s own creation — inflation and falling reserves leading to the devaluation and job destruction they have tried to avoid — although the slump (especially in the auto industry) owes plenty to the slowdown in Brazil. That giant neighbour with annual inflation barely above six percent and bulging reserves of some US$350 billion has not come even close to flirting with default and yet its economy is grinding to a halt in very similar fashion to here.
Nevertheless, the “blame it on Rio” approach does not quite work — there are too many areas (for example, statistical manipulation and energy policies) where the government is uniquely the architect of its own destruction. And under Mother Nature vultures feed on decomposition.