Argentina’s default could worsen struggling economy
By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)
Argentinian stocks rebounded strongly on Tuesday and Wednesday, as the country headed into the long-awaited two-day debt negotiation with creditors. A small group of hedge funds are demanding full payment for bonds it purchased at a discount when the country defaulted in 2001.
Since the bonds were issued in U.S. dollars, they fall under U.S. law. That’s why last month a U.S. court blocked Argentina from making a $539 million interest payment to just the bondholders who had restructured their debt with the country in 2005 and 2010. The court basically said it was all or nothing, and that Argentina couldn’t pick and choose who it made interest payments to, in order to avoid default.
Argentina is attempting to avoid paying the full value of the bonds plus interest owed to the hedge funds, that’s estimated to be worth roughly $1.5 billion. Instead, Argentina has suggested it would give the same settlement deal it gave the other, more desperate investors, back in 2005 and 2010. The one problem with that argument is that the Argentinian economy is much stronger today than it was in 2001.
Although the FTSE Argentina 20 index is higher by 5.55 percent and the top performer over the past five trading days, sometimes it doesn’t pay to be early. As Wednesday came to a close, neither side was willing to budge from their positions, putting Argentina in immediate default.
Argentine Economy Minister Axel Kicillof emerged from the meeting saying, “Argentines can remain calm because tomorrow will just be another day and the world will keep spinning.” Earlier in the day, Kicillof dismissed the Standard & Poor’s decision to put the country on “selective default” when the country failed to make the $539 million interest payment, stating, “Who believes in the rating agencies? Why didn’t they warn the owners of mortgages in 2008 if they know so much about risk?”
However, some economists see the situation as being much more serious than Kicillof. Although Argentina has been shut out of the international capital markets since its default in 2001, economists now expect borrowing costs will likely rise to levels that could put a strain on state institutions and the private sector. Additionally, this could worsen the recession Argentina is currently in, trigger higher inflation, devalue the country’s currency and bond prices, and possibly lead to a second devaluation later this year.
Kicillof seems to have a grasp of planetary science, but what he seems to be missing is how his unwillingness to pay Argentina’s debts in full may have just made life for the average Argentinian a little bit tougher when the sun comes up.
This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.