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Argentina: Just Pay the Vulture Funds Already

By: Iván Cachanosky - @ivancachanosky - Jun 10, 2015, 1:59 pm
El fallo del juez Thomas Griesa solo reconoce que los holdouts también son deuda soberana argentina (Tizaycarbon.com)
US judge Thomas Griesa has recognized that the “me too” holdouts also possess legitimate Argentinean sovereign debt. (Tizaycarbon.com)

EspañolThe Argentinean government was shocked and disappointed over the decision made by New York judge Thomas Griesa last week to add US$5.4 billion to the debt claimed by holdouts battling Argentina in US courts. This brings the total amount that renegade investors are demanding from the South American nation to $15 billion.

But the figure isn’t new nor surprising. These 500 new “me too” bondholders just lagged behind in their lawsuits. In 2012, Judge Griesa’s first ruling ordered Argentina to pay up $1.3 billion, which the administration of President Cristina Kirchner refused to do. Even then, everybody knew that sooner or later the debt would eventually climb to around the current sum, after the Rights Upon Future Offers (RUFO) clause expired in December 2014.

Leaving the issue of the behavior of the “vulture funds” aside for a moment, the right thing to do after losing such a lawsuit is to choose the least costly solution. Do the costs of repaying the debt really outweigh its benefits? Unfortunately, the Kirchner administration refused to pay, defaulting again on Argentinean sovereign debt.

Despite much rhetoric from the president and government officials to the contrary, the world now sees Argentina as a country that does not fulfill its obligations. Kirchner can avoid mentioning the word default all she wants, but she cannot avoid the consequences of financial evasion.

All the evidence is there for those who care to see.

First, the national debt keeps growing as the interest on past due bonds piles on. Meanwhile, because of the default, it has become more expensive for Argentina to find credit abroad.

Not long ago, Economy Minister Axel Kicillof boasted that the government had issued new bonds for US$3 billion. What he failed to mention was the 9 percent interest rate Argentina will have to pay for them; in the region, only Venezuela pays more to secure its loans. Neighboring Chile and Paraguay, for instance, issued bonds at 3 and 4.5 percent, respectively.

The ruling party’s discourse lauds a supposed debt-reduction policy, but Argentina continues to incur new obligations at some of the highest going rates around.

This cost, often hidden by the government, makes refusing to pay the holdouts more expensive than simply stumping up the cash, especially after the expiration of the RUFO clause. It also proves that the Kirchner administration never intended to settle with the hedge funds, and that the alleged impossibility of repayment due to the RUFO clause was just an excuse.

It would have been much more sensible to reach an agreement similar to the one the Argentinean government made with Repsol-YPF, issuing new bonds so as to reduce the impact on the country’s reserves. Of course, this way out also has an added cost, but it’s lower than taking the route of a second default. As long as Argentina continues down this road, its debt and isolation from the rest of the world will only worsen.

Another damage done to the economy arises from foregone opportunity costs. There’s an excess of liquidity around the world and Argentina should stand more than a good chance of attracting the capital. However, the Kirchner administration has eroded the country’s institutions to such an extent that potential investors are looking to put their money elsewhere.

By striving to improve its institutions, Argentina would receive better offers from creditors abroad. This new investment would in turn create more jobs for Argentineans. However, while the government refuses to negotiate with the holdouts, produce credible statistics, and tear down forex restrictions, investment will be scarce.

It cannot be stressed enough that there is capital willing to come to Argentina, but only with stability and clear rules set in place. The Kirchner administration, however, is very unlikely to change course and suddenly bolster institutional quality.

Turning things around will be a challenge for the next administration, which will inherit an economy strangled by state intervention. If the incoming government in December is able to generate the necessary burst of hope, it might just attract enough foreign capital to help Argentina face the dim economic outlook and reverse the current recession.

Translated by Daniel Duarte.

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.