Argentina – Been there done that
It is a sure sign that the global financial markets are in their summer doldrums and hard up for a story to stir up some action that they are clinging to an Argentine default as a trigger for a monetary apocalypse. However it is also yet another case of Wall Street getting Argentina wrong as it has done so many times in the past. Things are very different now to how they were in 2001. At that time Argentina had over $150bn in foreign currency denominated debt, most of it held by foreign banks. This time around the debt amount is far smaller and it is not the totality of the debt that is in question but rather the small amount (less than $2bn) that is the hands of New York vulture funds. They had accumulated this after the first default and then refused to play ball when the vast majority of creditors accepted the terms of a debt restructuring in the early years of last decade. The New York courts with a cavalier disregard for the interests of non-plaintiff debt holders have triggered a cross-default.
While there was much noise about impoverished Italian pensioners demanding justice, the real noisemakers were the vulture funds that had relieved the Italian pensioners of their beaten down holdings at brutally low bargain basement prices. In fact the pillaging of the pensioners was more by the vultures than by the Argentine government. Those original holders that hung on and accepted the restructuring terms ended up getting paid interest for the past decade, with returns indexed to the very handsome growth in the Argentine economy. Ironically it is now that the investors who accepted the restructuring are having their comfortable regime crimped by the vulture funds precipitating naïve (or self-important) New York judges into partisan actions that in fact do the US financial markets no favours either. The experience of Argentina over the last 13 years has shown sovereign borrowers that designating NY law or courts as the jurisdiction on an international debt tranche can be a decision that the borrowers may long come to regret. In this process the on-going marginalization of the US through over-reaching extra-territoriality, predatory pursuit by the SEC of revenues through random (and/or highly targeted) fines and the vicissitudes of the US class-action culture has made NY capital markets as attractive as being in the last days of Pompeii.
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If you ask us the latest down-move “in response to the Argentine default” is just Wall Street looking for an excuse to blow off steam considering the extraordinary run that the main markets have had over the last two years, with P/Es at abysmal lows and many blue-chips trading at record highs. Like drowning men the brokers are grasping at any excuse to justify a sell-off. With the amount owed to the “hold-outs” being equivalent to the amount traded on the NYSE in a few minutes (or maybe seconds in these days of high velocity trading) to attribute a market pullback to Argentina is to give the denizens of Buenos Aires too much credit. Frankly the country has shrunk to irrelevance in international financial markets over the last 13 years as the Kirchner clan (first Nestor then his wife, Cristina) have steadily isolated the internal capital market from the international flow of things. In some ways it resembles the bad old days of Enver Hoxha in Albania. A major financial crisis should be made of sterner stuff.
Wall Street though always believes in a regular dose of self-flagellation when things start to look a bit toppy. It’s almost as if they are willing a reverse in the markets as some sort of punishment for their own recent prosperity. However clandestine exchange shops as they did back in the hyper-inflationary heyday of the 1980s. Speaking as one who also has pesos sloshing around unloved on the banks of the Rio de la Plata, I can say that CFK (as she is politely known) has been way cannier than many would credit at stopping dead in its tracks the cycle of runs on the currency, followed by hyperinflation that usually lead to an (ex-) President fleeing the Casa Rosada in a helicopter. She has staved of the evil day with great effectiveness despite her seemingly rustic and erratic economic style.
Much ado about nothing is translated into Argentine Spanish as “mucho ruido y pocas nueces” (much noise and few nuts) and indeed this is particularly apt in this case. Argentine foreign debt is held massively by Argentines these days. We suspect that something will be cooked with existing holders to give them debt equivalent to what they already hold but governed in a different jurisdiction from that of the ornery US justices. CFK is as mad as hell and she is not going to have any truck with vulture funds. She would not have held out as long as she has if she was not one tough cookie. It’s ironic that the vulture funds call themselves the “hold-outs” when in fact it’s CFK who is the “hold-out” against their rapacious claims.
In the final wash though it’s all a storm in a mate gourd (the implement from which the Argentines drink their favorite herbal infusion, yerba mate).
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>