Will next week’s crisis be in Argentina?

Cristina Kirchner to vulture funds: Hasta la vista, suckers!
Cristina Kirchner to vulture funds: Hasta la vista, suckers!
Image: AP Photo/Eduardo Di Baia
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Midnight last night was the final deadline for Argentina’s government to come up with a plan to pay bondholders or face a default on its foreign debt. Perhaps jealous of all the attention Cyprus is getting, it seems to be leaning toward the latter option.

The deadline came as part of a long legal confrontation between the South American country and a group of “hold-out” investors. The investors snapped up Argentina’s debt on the cheap and want it paid back in full, unlike earlier bondholders who agreed to take a partial loss, or “haircut.” A US federal court considering the merits of the two sides’ arguments essentially gave Argentina two choices: Come up with a plan to pay all of its creditors, including the hold-outs, or pay none of them, resulting in at least a temporary default.

When a three-judge panel issued that ruling a month ago, some experts wondered if it could open a door for a kind of sovereign bankruptcy court that could force the hold-out investors to accept payment on a more leisurely schedule. Others saw the court forcing Argentina to go on the record officially refusing to compromise. Instead, Argentina has offered up a plan to exchange the hold-out investors’ bonds for new ones with a 25-year maturity and a roughly 70% haircut—pretty much the same deal it offered other bondholders.

That’s not exactly what the court, or the investors, are looking for. With the deadline for its next bond payment coming tomorrow, if judges do nothing the country could end up in arrears by Monday—which, perhaps fittingly, is April Fool’s Day—and thus in default.

That, in turn, would be very bad for the country’s economy. It’s already cut off from most foreign borrowing and investment, thanks to repeated defaults and a nasty habit of nationalizing foreign companies. Today, Argentinian inflation is near 30%, according to independent estimates (nobody believes the official figure of 11%), and that has everything to do with its battles with foreign creditors.

“Because Argentina can only borrow in domestic markets, it has done what countries around the world do when they have financing burdens that global markets won’t absorb, and that is create bank reserves for their own financial institutions to buy the debt,” says Robert Shapiro, an economist who chairs an American group seeking to end the standoff and normalize trade relations with Argentina. “By creating these bank reserves, they inflated the money supply and that’s helped drive the inflation up.”

Earlier this month, Brazilian mining giant Vale suspended a $6 billion mining project after inflation and exchange rate fluctuations drove up the cost.

Refusing to pay the foreign “vulture funds” that took Argentina to court has become a political touchstone for Cristina Kirchner, the country’s fiercely nationalistic president. But she would do well to find a way to end the debt standoff,  Josh Rosner, managing director at Graham, Fischer and Co., told the Associated Press:

The government could say “you know what, we fought for what we thought was fair and equitable, but for the greater good of Argentina, we have to put this in our past so we can normalize our relations with international markets…at the end of the day the only way we can protect the lives of the Argentines we have sworn to protect is by not going down this dangerous path.”