Why Argentina Is Struggling to Find Lifelines
2:20 PM, Mar 26, 2014 • By JAIME DAREMBLUM
Regarding the private bondholders who have sued Argentina in the U.S. court system in hopes of receiving full payment on their defaulted debt: Back in August, the U.S. Second Circuit Court of Appeals upheld a district-court ruling that had ordered Buenos Aires to put $1.33 billion into an escrow account for the private creditors, and in November the same court refused to rehear the case. Last month, the Kirchner government formally asked the U.S. Supreme Court to reverse the Second Circuit’s decision. Regardless of whether the Court chooses to hear Argentina’s appeal, Buenos Aires has repeatedly declared that it will not comply with U.S. court orders to compensate the holdouts. Indeed, as Ohio State University law professor Steven M. Davidoff recently pointed out: “A number of Argentine officials have stated that the country will default on its current bonds if it is required to first pay the old holders.”
The threat of yet another default highlights the magnitude of Argentina’s ongoing economic crisis. On March 17, Moody’s Investors Service once again slashed its government bond rating. Explaining the decision, Moody’s cited both the dramatic fall in Argentina’s foreign-exchange reserves—from $52.7 billion in 2011 to $27.5 billion today—and the country’s “inconsistent policy environment.” Its official statement read in part: “While reserves have stabilized in the last month, there are continued high risks of further drops, a key credit risk since Argentina lacks international market access and utilizes central bank reserves to meet its foreign currency debt obligations.”
A declining trade surplus has fueled a dollar shortage, which in turn has created a huge black market in Buenos Aires and other cities. Annual inflation was close to 30 percent in 2013, and may reach as high as 45 percent in 2014. Not surprisingly, capital flight from Argentina continues, despite the government’s imposition of strict currency controls, and the country has also been shaken by police strikes, teacher strikes, power outages, and deadly riots.
“The situation is a lot more serious than the government is letting on,” Kathy Lien of BK Asset Management told Bloomberg Businessweek last month. “If we were to see them default in this environment, it would have global repercussions. While the world is very different than it was in 2001, I don’t think other economies will escape without damage.” At a January 15 Hudson Institute conference, Diego Ferro of Greylock Capital Management said that, absent significant policy changes, “I doubt that Argentina can reach 2015 in one piece.”
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