Argentina faces second default in ten years
Material posted: Publication date: 29-11-2012

The credit rating of Argentina on November 27 was lowered by Fitch on five levels to "SS", which is close to the level of default. It is not excluded that in the near future South American country, like 10 years ago, will prove financially untenable. The reason for this can be the old debts to private investors, not paid during the time preceding bankruptcy.

At the time, Argentina had experienced a "financial tsunami", similar to what has now engulfed the countries of southern Europe. Reform of the IMF of the 90s, focused on the growth of private investment into the country from abroad under a hard peg of the local currency to the dollar, collapsed, and after the mass outflow of the capital of the Republic was one on one with a debt of $ 100 billion.

Contemporary Greece and Spain may come to the aid of Brussels. Argentina had to rely only on themselves - and those efforts were not enough. A full-scale economic crisis accompanied by riots in the streets and "cacerolazo" ("marches of the empty pots"), forced the government to focus on solving current problems of the population, not investors. In 2002 the government decided on a Declaration of sovereign default, which has become the biggest disclaimer in history.

Outstanding loans from the IMF, Buenos Aires still returned, but the bondholders of the country much less fortunate. They were able to negotiate debt restructuring on terms of payment by Argentina 30 percent of the body of the debt. However, not all agreed with this situation. A part of bonds was bought for a pittance so-called "investor vultures" who have decided to obtain debt at face value through the courts.

In particular, the hedge Fund Elliott Capital of U.S. billionaire Paul singer has acquired securities Argentina in desperate lenders on a $ 1.3 billion (the purchase amount was significantly, if not an order of magnitude less). The courts of first instance satisfied the claims of the investor, but the money he never received. Then, the Fund has declared financial war on Argentina. In 2007 and 2010 he twice tried to arrest the presidential plane. In October 2012, Elliott Capital has succeeded in the arrest of the Argentine Navy ship "Libertad". But then Buenos Aires remained adamant.

In parallel, investors are again applied to the court to delineate the period sought the return of their money, but also provide specific sanctions for non-payment. On November 23 a Federal court in new York headed by judge Thomas Grisou heed the exhortations of "vultures" and agreed to make all payments until December 15. In addition, Bank of New York Mellon, which carries out transactions with foreign (including Argentine) bonds, demanded not to carry out any transaction for Argentina. That is, if the debt to Elliott Capital not paid, Buenos Aires will not be able to repay the debt and other creditors, which the country is obliged to pay about $ 20 billion, previously restructured.

The situation in the economy of Argentina is now far from ideal, judging by draconian measures the government is fighting the flight of capital. But the difficulties are not so great that Buenos Aires was not able to return $ 1.3 billion - just 0.24 per cent of GDP. In another case. If the country's President Cristina Kirchner will make concessions, it will open "Pandora's box" - the game will take other holders of such unstructured debts. And this is a much more substantial sum - about $ 11 billion.

So it's no surprise that the answer was a firm "no". The Argentine economy Minister hernán Lorenzino said on 23 November that the government refuses to accept the court's decision and intends to appeal. Even before the meeting was made by Kirchner with a rigid statement that the government will not pay "a single dollar".

On the side of Buenos Aires, in this case, were the creditors who agreed to the restructuring. They risk losing the money they still owed, and the debtor will be formally not guilty. They tried to convince the judge the GRIZ in this process, but their reasons seemed a new York court is not strong enough.

Most interesting is that Argentina, refusing to pay, especially nothing to lose, at least at the government level. For Cristina Kirchner's tough stance is a great way to increase its political influence, somewhat shaken recently because of a series of unpopular laws, including tightening control over the export of currency from the country. That Buenos Aires should not have to pay anything other than what he had agreed with creditors, meet representatives of all parties and political views of the South American States.

Not particularly terrible is the default and as such the Argentines this is not the first time. After a state of bankruptcy 2002 foreign lending to the state has virtually stopped. Argentina for 10 years avoiding foreign loans in any form - and the end of the world for her, in General, came. There is no reason to believe that this time will be different.

But the psychological effect should not be underestimated. The default will be another cause of the undermining of investor confidence in the Argentine economy after the scandal with the nationalization of leading oil company YPF and the country's measures "unorthodox" fiscal policies. The private sector as a result may suffer greatly from lack of investments from abroad, as the Argentine economy is not large enough to thrive in conditions of investment of the "iron curtain".

Meanwhile, analysts are pretty sure that the Argentine default in December will still happen. It is not only rating downgrades, but also in terms of credit default swaps for the country. The latter indicate the probability of failure for the obligations of 75 per cent. It remains to be seen whether the default secondary from the point of view of the global economy a catalyst for the next shocks to the level of global Finance.

Dmitry Migunov


Tags: economy , crisis