Paying Peter to rob Pablo

Financial Adviser, Political Analyst and Jolly Globetrotter Alex Rosen on Argentina’s quest to return to the financial markets

2001 was not a good year for Argentina. A decade long economic expansion program, fueled in part by ever-increasing foreign debt and an inflexible currency peg, led to one of the most dramatic economic collapses of the 21st century.

Just one year into a new millennium and Argentina was already a candidate for crash of the century. At least in the 20^th century it took until late 1920’s to declare a winner.

After the largest sovereign default in recorded history (totaling over US$80 billion), Argentina owed money to what may be described as the economic group of death; a collection of the biggest names in international sovereign lending.

Argentina had been eliminated from the group, and the lenders wanted their money back before they let Argentina play again. As Hans Gruber once said “when you steal US$600, you can just disappear. When you steal US$600 million, they will find you”.

When you default on almost US$100 billion, you will have to make amends.

For most creditors, payback meant taking a huge haircut. However a few holdouts waited for a better deal. One of the major holdouts was the Paris club, which reached a deal last month with Argentina that called for the repayment of almost US$10 billion in outstanding debt over the next five years.

This agreement was the culmination of a long and contentious process that was finalized only when President Cristina Fernández de Kirchner was able to circumvent the IMF and deal directly with the Paris club.

Settling with the Paris club meant that there was just one significant outstanding creditor: the so called vulture funds—firms that purchased Argentina debt at steep discounts as the Argentine economy spiraled out of control—with the explicit purpose of holding that debt until it could force Argentina to pay full whack.

These funds have taken to the sympathetic US court system to try and get their US$1.3 billion pounds of flesh from the Argentine government. Even these creditors may actually see some restitution in the near future.

Tell it to the judge. Oh, wait, they did. And the judge didn’t listen

Does the punishment fit the crime?

Due to the 2001 implosion, Argentina has had an extremely hard time borrowing money over the last dozen years. The country has instead relied on internal reserves and funny math to keep the economy afloat. Official numbers put out by the Argentine economics bureau are widely acknowledged as bogus, and while it may have been an amusing story for a while, eventually it caught up to them.

That system worked in the short term, but now Argentina’s reserves have dwindled to a point where even creative accounting and import restrictions can’t hide the truth that Argentina is running out of money. Current foreign reserves are around US$27 billion and shrinking. The economy is moving toward a recession as inflation is running around 20 percent officially and 30 percent unofficially while industry output fell 4.2 percent in April.

As Argentina flirts with another collapse, President Kirchner has been actively trying to resolve outstanding debt issues so that when the inevitable happens, her country can at least turn to the group of death with a reasonably straight face and ask for help.

If the global lending community turns it back on Argentina this time, it will be interesting to see who will bear responsibility for the collapse. Yes, they have almost completely repaid the debts from the last default, but only when it became obvious that they would be needing to borrow money again.

It is kind of like paying off your credit card balance so that you can ask for a higher limit and borrow more.

While no one wants a repeat of 2001, this time the Argentine government would have a very difficult time pointing the finger elsewhere. In 2011, I interviewed people in Argentina and asked them why they supported Cristina and the Peronists for reelection. The answer I got more than once was that people wanted the Peronists to be in power when the economy collapsed so that finally they would be forced to account for their actions.

If the reserves run dry and the group of death says no mas, they may just get their wish.