Weighing Argentina's Financial Options
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Argentina may be on a path to bankruptcy. On Sept. 29, a U.S. federal court found the Argentine government in contempt for trying to reissue and relocate the debt from its $132 billion default in late 2001. This latest tactic in a long-running battle that has played out in U.S. courts would have kept Buenos Aires from having to repay its holdout and hedge fund bondholders -- those who sued to avoid having to participate in a negotiated settlement of the debt -- upfront and in full. The ruling will have little effect on Argentina in the short term, but as 2015 approaches, Buenos Aires will either remain in default or be forced to settle its outstanding debts, something the government does not have the money to do.
Argentina has been excluded from the international credit system for almost 13 years. But its reliance on internal credit for financing, combined with having to repay its bondholders in full, would lead to financial insolvency. From here, the best move for Buenos Aires is not to move at all, at least until Argentina's bargaining position fundamentally changes. Buenos Aires hopes it can begin repayment through its existing debt swap scheme after the new year. Perhaps then it could pay the $1.6 billion it owes to the hedge funds and the $15 billion demanded by the holdouts, appeasing the Manhattan courts and leaving Argentina free to continue repayments to the rest of its bondholders. Although workable in theory, the debt swap faces practical complications, not least of which is the fact it will take time, and technically Argentina would remain in default.
But Argentina has perhaps one more option: finding a third party to act on its behalf. If Buenos Aires can find such a party to cooperate with the holdouts and hedge funds, it could ignore any pressure to pay the holdouts in full. This would buy some time in the short term, but it would do little to assuage the international pressure on Argentina in the long term. In any case, finding a third party to effectively bail out the Argentine economy is no small task, and it would likely require the services of a premier financial institution such as JP Morgan. (Interestingly, Argentine President Cristina Fernandez de Kirchner met with George Soros in New York on Sept. 22, though details of what the two discussed have not been released.) Any option that would appeal to Argentina has expired, and now the government has no choice but to endure its financial hardships for the next few months. This means that 2015 will change the country's fortunes, for better or worse.
Argentina has been excluded from the international credit system for almost 13 years. But its reliance on internal credit for financing, combined with having to repay its bondholders in full, would lead to financial insolvency. From here, the best move for Buenos Aires is not to move at all, at least until Argentina's bargaining position fundamentally changes. Buenos Aires hopes it can begin repayment through its existing debt swap scheme after the new year. Perhaps then it could pay the $1.6 billion it owes to the hedge funds and the $15 billion demanded by the holdouts, appeasing the Manhattan courts and leaving Argentina free to continue repayments to the rest of its bondholders. Although workable in theory, the debt swap faces practical complications, not least of which is the fact it will take time, and technically Argentina would remain in default.
But Argentina has perhaps one more option: finding a third party to act on its behalf. If Buenos Aires can find such a party to cooperate with the holdouts and hedge funds, it could ignore any pressure to pay the holdouts in full. This would buy some time in the short term, but it would do little to assuage the international pressure on Argentina in the long term. In any case, finding a third party to effectively bail out the Argentine economy is no small task, and it would likely require the services of a premier financial institution such as JP Morgan. (Interestingly, Argentine President Cristina Fernandez de Kirchner met with George Soros in New York on Sept. 22, though details of what the two discussed have not been released.) Any option that would appeal to Argentina has expired, and now the government has no choice but to endure its financial hardships for the next few months. This means that 2015 will change the country's fortunes, for better or worse.
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