October 23, 2014
Vultures deal must be sealed after RUFO
Cost of refusing to settle for nationalistic reasons would outshine any theoretical gains
From the very beginning of the vulture funds saga it was pretty clear that Argentina would fall, again, into a default of its sovereign debt. A curious one, given that it is a product of a New York court judicial decision, which prevents the country from paying even when it has the money to do so and, moreover, has already made the corresponding bank deposit.
The situation is absurd and unprecedented, but for the international financial community it is still a default in any event — the fact that the money is not coming into the hands of the creditors is the only thing that matters. Unfair? Sure, but also real.
Given that, the important question is whether this default will be a short or long one. The former scenario is not innocuous but the latter would probably lead to even more serious problems and likely to second-generation litigation. Observers are divided but we can deduce what is most likely coming.
Analysts who foresee a long default believe that the lack of an agreement with the hedge funds about a method of payment during the one-month period ending on July 30 is not only due to the fear caused by the RUFO clause (Rights Upon Future Offers), which expires in December but until then could lead to disastrous lawsuits by “holdins” (restructured bondholders) for over US$120 billion. The hunch here is that President Cristina Fernández de Kirchner would be tempted to play the nationalist card and keep the promise, several times suggested, of not paying the vultures.
Those opinions are based on the favourable social impact that is paving the way for the government’s handling of the issue — an important factor to take into account when an electoral 2015 is already around the corner.
The Consultant Artemio López told me in a dialogue on Radio el Mundo that 65 percent of Argentines support the official stance on the issue. About 40 percent, he added, could vote for a Kirchnerite presidential candidate if elections were held now.
That 25-point difference shows that the “anti-vulture” cause far exceeds Kirchnerism and, in that sense, its electoral impact should be limited. It seems that the economic situation, very delicate at the moment, would weigh more heavily on the social mood on the actual election day.
“It is regrettable that a small group of people be able to take hostage an important country like Argentina but that is the cost of having issued debt under New York law. The government was right but that is now a philosophical matter. The important thing to do now is to solve the situation and there is a window of opportunity to do so. It is necessary for Argentina to act before the emerging market party is over,” Walter Molano, the chief economist in BCP Securities, told me in another radio interview.
“The RUFO clause is a serious problem and the government must be careful. The problem can be solved after December (when it expires), but it could be better to do it beforehand via an agreement between private parties. There is not much time, because of the possibility of a change in international conditions, especially at monetary level. There already are signs of higher interest rates in the United States, which would make the emerging countries’ debt more expensive,” he added.
But an “agreement between private parties”, like the one attempted by Argentine banks or the one in course proposed by a group of foreign banks is difficult. The former have already failed and the latter face many obstacles.
Those banks (Citibank, JP Morgan, HSBC and Deutsche Bank) should negotiate on three different tables: with the vultures, in order to buy at least part of their U$S1.6-billion lawsuit; with the Kirchnerite government to get some kind of commitment about a future refund of that money; and with their own headquarters, something not minor at all. Economists like Guillermo Nielsen give zero chance to initiatives like this but Reuters news agency has anticipated an imminent understanding on that basis.
If finally that initiative fails, this solution might again be a possibility after the December 31 deadline. But what would happen after that?
Political analysis cannot be based on improvised psychology — nobody knows the inner ideas and purposes of President Cristina Kirchner. Rather, it should find its roots in objective conditions, which in this case indicate that lengthening the default could prove very harmful for the economy and, with it, for any electoral dream — if not to impose a president, then at least keeping Kirchnerism as an important factor of power.
Soy prices are no longer what they used to be. Exports are down and will remain even lower until devaluation expectations stop. Dollars are scarce and without increasing them, it will be impossible to face more imports, a condition for any economic rebound.
Inflation remains very high, even in a context of recession, which is especially worrying. Public spending, already too high, is no longer an unlimited tool.
The costs of playing the nationalist card seem higher than any theoretical gains. And, more important, they could be impossible to afford when the country and the provinces face heavy payment deadlines in the next year and a half.
The only chance to improve, partially at least, the economic environment has to do with restoring some access to capital markets. Let us remember that this (expressed in the agreements with the International Centre for Settlement of Investment Disputes, the Paris Club and Repsol) was the path followed by the government before Thomas Griesa’s blow changed everything.
That solution depends on closing the vulture threat as soon as the RUFO clause is no longer a limit. It is impossible to be certain today if that will be the policy chosen but it looks like the most likely.
We may be sure that this is the bet on course when the official discourse changes from the axis of national dignity to one of responsibility. A jump seen many times during the 11-year Kirchnerite era.
* Marcelo Falak is a political scientist and international news editor with the daily Ámbito Financiero.