Argentina aims to calm nerves after default

Economists warn that without a quick solution the economy will sour.

Argentina aims to calm nerves after default

World Bulletin / News Desk

Argentina’s government has tried to soothe the nation's concerns over the economic impact of its debt default, while also laying blame on a U.S. judge, his mediator and a small group of creditors they call "vulture funds."

"You can be very calm," President Cristina Fernandez de Kirchner told the nation in a televised address late Thursday. "Life continues as it always does every year."

She spoke a day after the country failed to complete a $539 million interest payment on bonds restructured from a $100 billion default in 2001.

Argentina went into default on the payment because a U.S. court order required paying back plaintiff creditors at the same time. The $539 million was owed to the 92.4 percent of the creditors from the default that participated in the restructurings of the bonds at which they accepted 30 cents on the dollar.

The plaintiffs, among which is NML Capital, a hedge fund of U.S. billionaire Paul Singer, sued to get paid back 100 cents on the dollar on their bonds, equivalent to one percent of the defaulted securities. With penalties and past-due interest, their claim reaches $1.5 billion. U.S. federal judge Thomas Griesa ordered them to get paid in cash at the same time as the holders of restructured bonds.

Argentine Economy Minister Axel Kicillof said this week that such a payment would be "impossible" because it would violate a local law preventing the authorities from paying more than what the 92.4 percent got.

He added that the $1.5 billion settlement would also break a rights-upon-future-offers clause that allows the restructured bondholders to collect the difference, or up to 70 cents on the dollar. That would expose the country to more than $120 billion in claims from the restructured bondholders, Kicillof said.

Instead, the government chose not to pay the plaintiffs and go into default, a move it has said is not really a default. That is because, as Kicillof argued in a televised press conference Thursday, the country has deposited the funds for paying the $539 million but the court has blocked the paying agent including the Bank of New York Mellon from distributing the money to the bondholders.

'Griesa default'

President Kirchner also echoed her economy minister's assessment.

"To default is to not pay," she said. "Preventing somebody from paying is not a default. They are going to have to invent a new word for it."

Kicillof suggested it could be called a "Griesa default," named after the U.S. Judge Thomas Griesa, who presides over Argentina's debt structuring.

No matter the denial, credit rating agencies have come to call it a default. The New York-based International Swaps and Derivatives Association ruled as such Friday, calling it "a failure to pay credit event."

Kicillof said Thursday that it would make sense for a private bank to purchase the defaulted bonds to protect their holdings in restructured bonds from a decline in secondary markets. Then they could ask Griesa to suspend his order until 2015, when the legal impediments for settling will be gone. The rights upon future offers clause expires at the end of 2014.

No matter the government’s reaction to the default, one thing remains clear: it still has to pay what it owes.

This was Griesa’s assessment after a hearing Friday between the plaintiffs and Argentina’s lawyers in New York, when he told everybody to "cool down" and focus on the facts.

The hearing came after Fernandez de Kirchner, Kicillof and other officials came out to slander Griesa and his mediator on the case, Daniel Pollack, for being biased toward the plaintiffs and unfit to hear such a complex case.

What can the country do now?

Besides telling her people to take it easy, Fernandez de Kirchner repeated Kicillof’s plan of action.

"Argentina is going to use all the legal instruments" it has available to defend the 2005 and 2010 bond restructurings, she said.

She added that the channel of communications is open with the judge and plaintiffs to find a solution, but added: "We also must defend the rights of our country."

The default, however, may bring economic woes, economists warned.

Luis Palma Cane, an economist at the Buenos Aires-based financial consulting firm Fimades, said the consequences of the default, if not resolved in the next few months, will be a surge in uncertainty. This will increase interest rates and inflation already running at 30 percent annual. In turn, investment and consumer spending will fall, the economy will slow and unemployment rise, he wrote in an email.

International trade will decline and companies and people will take dollars out of the market to protect their savings, leading to a decline in central bank reserves already at a seven-year low of $29 billion.

However, if the government can pull out of default in the next two or so months, there will be little impact on the economy, said Federico MacDougall, an economist at the University of Belgrano in Buenos Aires.

The biggest threat of a prolonged default is that it would trigger clauses in the bonds that could push all of them into default, not just the Discount Bonds that went unpaid this week. If this clause is triggered, creditors can exercise a right to demand immediate repayment of all the debts in full.

"Argentina would never be able to pay its debts if that happened," not even what is owed to the plaintiffs, said MacDougall.

"This is the main reason to believe that a quick solution is possible," he said. "It may be the only option."

Güncelleme Tarihi: 02 Ağustos 2014, 10:09