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Argentina Joins the “VIP Club” in Contempt of US Justice

By: Iván Cachanosky - @ivancachanosky - Oct 3, 2014, 2:33 pm
Argentina becomes only the third nation in history be in contempt of US courts.
Argentina becomes only the third nation in history be in contempt of US courts. (IA)

EspañolNew York Judge Thomas Griesa declared Argentina to be in contempt during the last hearing involving the vulture-funds case. NML Capital and other holdout bondholders requested that Judge Griesa impose such a penalty, given the country’s failure to pay the US$1.3 billion owed.

Even though Griesa had twice rejected their request, this last hearing was scheduled for the purpose of this issue specifically, and a ruling against Argentina was expected. However, the judge chose not impose the $50 million daily fine that Paul Singer and the other holdouts requested.

It’s strange that the “conspirator Griesa” did not take the opportunity to further favor the holdouts, and for that matter, that he rejected the same request twice before. To the contrary, he appeared to be extending his patience, waiting for Argentina to come to her senses and demonstrate a willingness to pay in the future.

However, it is increasingly clear that if the Argentinean government’s strategy is not to pay, then this contempt ruling will not change their minds — not when there is no financial penalty.

This does not mean a lack of observable consequences in the future, but in the short term, Griesa’s decision will likely not have much of an impact.

In truth, Judge Grieisa’s decision was not surprising, since, in practice, Argentina was already in contempt.

Argentina’s Sleight of Hand

The official government response was, as usual, to aggravate the US justice system and its officials. Even the Germans got their fair share in this last round. Instead of analyzing their own mistakes, the Kirchner administration has decided to outsource its flaws.

The Argentinean government chose to highlight the fact that in the past there have only been two cases in which a country was ruled to be in contempt. The first was the Republic of the Congo in 2004, which refused to pay the amount awarded to Paul Singer’s NML at trial. The second was in 2013, when Russia was hit with daily fines for failing to return some old manuscripts to the Brooklyn Museum.

What is striking is that Argentinean officials are presenting these examples as a way to imply some kind of extremism on Judge Griesa’s part. We need not worry, apparently, since Argentina will be on the “VIP list” of countries in contempt of US courts.

Why is this happening to Argentina? The answer lies in the government’s fiscal irresponsibility over much of its history. Excessive debt was transferred from administration to administration, a product of excessive government spending, both past and present. Kirchner has undoubtedly contributed to the debt, as even the official figures demonstrate, to say nothing of the private figures.

Of course, if those in power fail to even recognize that the nation is in default, then there is no chance they will recognize that the nation is in contempt. President Cristina Kirchner insists that the country has not defaulted, because it made its payment. However, the default occurred when the creditors were not able to collect.

If you buy a new car to be delivered to your home, and when the delivery date comes there is no car to be found, the logical thing to do would be to call the car company. What would your reaction be if the company said the car left the factory, and so therefore they consider it delivered?

Will the Government Pay Its Debt in January?

The question on the minds of analysts, politicians, creditors, and debtors the decision Argentinean authorities will make in January, once the Rights Upon Future Offers (RUFO) clause expires. In effect until January 2015, the clause stipulates that if Argentina offers any other creditor a better price for its bonds, then the “holdins” — the creditors who accepted the terms of the restructured debt — have the right to request the same price.

A few months ago, all signs indicated the government would not settle with the holdouts for fear that it would trigger this clause. However, Economy Minister Axel Kicillof’s statements have completely destroyed this potential solution.

As time has passed, what seemed like a timing issue due to the RUFO clause is now one that will likely extend until the end of 2015. At this point, it appears that Argentina will willingly pay bondholders, but not when the RUFO clause expires, when there is a change in administration.

Keep in mind, it isn’t true that the RUFO clause would be triggered if the government were to make payment before its expiration. In no uncertain terms, the clause states that the “holdins” can demand payment under better conditions only if Argentina voluntarily makes a better offer to the holdouts.

Obviously, acting under the orders of a US judge is not a voluntary act. Even still, as a precaution, avoiding even the slightest possibility of triggering the RUFO clause made sense as a strategy, given the high cost this would incur. Therefore, the logical thing to do would be to voluntarily pay up once the clause expires in January.

This is where the waters divide into two: on one side we have those who believe that RUFO was just an excuse not to pay, and the government never really had any intention to do so; on the other hand, there are those who think that once January comes around there may be a change of opinion, given that the Kirchner administration has previously implemented measure that it once seemed vehemently against (devaluing the official dollar, payment to Repsol-YPF, etc.).

What Will Happen the Argentinean Economy after January?

Argentina is heading into a recession in 2014, and the same is expected to continue into the following year. Getting out of default will not change this reality. It may be possible to mitigate the recession, if the debt is paid, or accentuate it if it is not. In either case, however, it will be very difficult to avoid recession heading into 2015.

As we draw closer to the expiration of the RUFO clause, many creditors are anxious to see what the Argentinean government will do, now that it has approved a law that changes the jurisdiction for payments and not everyone can collect.

If the government can begin to fix its situation, show a real willingness to pay, and creditors are able to collect payment without further complications, it could once again encourage investment in the country and reintroduce Argentina to the international market.

On the other hand, by perpetuating the default, many of the creditors that accepted the restructured deal will not be able to collect, and this will increase the risk of a cross-default as bondholders begin to demand accelerated payments.

For her part, the president insists on invoking the memory of her late husband, Nestor Kirchner, and remind the public that he was able to overcome the economic crisis of 2001 without funding or external help. However, at the time, the country did not have a fiscal deficit and the price of soybeans were in his favor. These days the fiscal deficit is growing, right along with government spending, and soybean futures continue to decline.

If the government truly wants to take measures that will not further harm the country, their best option is to pay their creditors once the RUFO clause has expired. Macroeconomic data alone cannot create the necessary conditions for the economy to rebound. The government must signal confidence and clean up the country’s institutions in order to attract investment and reverse the flight of capital.

Argentina has more than enough potential to attract investment, but the institutional weakness of the country keeps it away. The Vaca Muerta oil field, for example, would likely attract investors, given reliable institutions. Investments will come once the world can recognize Argentina once again as a place where the economy is expected to grow, institutions are respected, companies compete freely, and above else, there is fiscal discipline.

Translated by Guillermo Jimenez.

Iván Cachanosky Iván Cachanosky

Iván Cachanosky holds a bachelor's degree in business administration and a master's degree in applied economics. He's currently an instructor at CMT-Group. Follow him on Twitter at @ivancachanosky.