And you would have done the same thing too, if you had been in their shoes.
- By Shannon O'NeilShannon O'Neil is senior fellow for Latin America studies at the Council on Foreign Relations and author of Two Nations Indivisible: Mexico, the United States, and the Road Ahead.
On July 30, Argentina defaulted on its outstanding debt. The technical default ends a long saga. It began in 2001 when the country failed to continue payments on nearly $100 billion worth of obligations, continued through its 2005 and 2010 restructurings of over 90 percent of these bonds, bled into ongoing lawsuits with "holdout creditors" including Elliott Management and Aurelius Capital Management, and culminated in the June 16 decision by the U.S. Supreme Court to not hear Argentina’s appeal of a 2012 ruling by New York Judge Thomas P. Griesa. This left in place a decision that not only bolstered the holdouts’ rights to repayment, but also blocked Argentina and its U.S.-based banks from disbursing the next $539 million round of interest due on the restructured debt. Negotiations over the last month ended fruitlessly, leading to Wednesday’s selective default, as defined by Standard & Poor’s.
Many are bewildered as to why Argentina wouldn’t come to some agreement in the eleventh hour, given the seemingly manageable amounts of debt in play. But the truth is that Argentina acted sensibly, especially given the limited maneuvering room it had to work with.
For starters, the effects of default at home, at least in the short term, are minimal. Argentina hasn’t had access to international capital markets for well over a decade. This has made foreign currency often hard to come by, has led to big disparities between the official exchange rate and the unofficial "blue" market rate, and has more generally limited productive investment throughout the economy. But banks, companies, and consumers are now accustomed to this reality. So while the default keeps Argentina from re-entering international credit markets, it doesn’t change day-to-day life for most Argentines — ATMs still work, stores are still open, and business continues as usual.
In fact, rather than falling off an economic cliff, some experts see the default as a smart financial move. If Argentina paid the plaintiffs the more than $1 billion it owed, it would have opened itself up to the demands of other remaining outside creditors, which hold somewhere between $10 billion and $15 billion in debt. Further, some argue that the "rights upon future offers" (RUFO) clause in the restructured debt would enable those holders to ask for similar terms, reopening all of the $100 billion to new and better terms.
Having defaulted, Argentina can pursue other potentially profitable strategies. Finance journalist Felix Salmon argues that Argentina could now buy back the newly defaulted exchange bonds at a bargain on the secondary market. Or it could replace those bonds with locally issued debt, getting around U.S. courts and their jurisdiction. In fact, the exchange bondholders could earn more due to the accumulating interest on the defaulted bonds (assuming they are paid in the end).
Moreover, it was in Argentine politicians’ and policymakers’ self-interest to not settle. In 2005, Argentina passed a law forbidding policymakers from renegotiating with the holdouts. Part bravado, part politics, this law meant that Economy Minister Axel Kicillof and Finance Secretary Pablo Lopez had good reason to shy away from the negotiating table, if only to protect themselves. President Cristina Fernández de Kirchner is in her second (and last) term, and she is already looking toward her December 2015 exit. Breaking domestic laws, even for the greater good of the nation, can’t be an enticing alternative, especially given the history of prosecuting former presidents and their cabinet ministers for controversial policy choices.
This doesn’t mean Argentina will remain in arrears for long. In recent months it has made several market-friendly moves. It allowed the peso to devalue by roughly one-third early this year, working to make exports, and by extension the larger economy, more competitive. In May, it finally renegotiated its $9.7 billion outstanding Paris Club debt, some 13 years in the making. It also paid the Spanish-led oil giant Repsol for its expropriated majority share of YPF, Argentina’s national energy company. And it designed a new inflation index in line with IMF standards, ending its censure from the multilateral agency.
A resolution to this ongoing battle, however, will depend on both personal and market incentives aligning. Talk of the Argentine banking association buying out the plaintiffs continues, which could satisfy the holdouts, permit interest payments for the rest, and bring Argentina back from financial exile. The government, too, could step forward, particularly if its Congress repeals the criminalization of negotiations, which would give officials legal cover to resolve the debt crisis.
Until then, the Kirchner government will try to make political hay of its defiance. In his remarks to the press, Kicillof defiantly blamed the "vulture funds" for their recalcitrance and promised to defend "the future of the Argentine people." This bluster positions him — when the debt is resolved — as both the defender and then savior of the nation, which incidentally might be a strong platform from which to launch his 2015 presidential bid.