Wednesday, August 8, 2012

ARGENTINA: NOT STANDING TO THEIR WORD

With a new debt swap in place, President Christina Fernandez de Kirchner plans to end the eight-year-long muddle that started from a massive default in 2001. Manish K. Pandey argues that most of this is balderdash in a new bottle by the incorrigible Argentina, and that Argentina should not be bailed out by the developed world! Ever!

Though Christina’s predecessor, her husband Nestor Kirchner had restructured most of the debt and even repaid money borrowed from the International Monetary Fund, Argentina still remains in default of over $20 billion of debt from its 2005 restructuring and over $6 billion in Paris Club debt. Further, the Argentine economy currently faces multiple lawsuits brought by holdouts, who are primarily located in the US, Italy and Germany.

But with the new law in making, Christina is attempting to get over the bad-credit in one go. In fact, the President has already reached an agreement with a group of investment banks that hold about 50% of these outstanding bonds. Under the agreement, Argentina’s government would float $1 billion in new bonds through these banks, paying fees for the service on the side while retiring outstanding debt. Christina does hope that the acceptance of the offer by creditors would not only see such litigations lifted, but will also open the doors of international credit markets for Argentina.

But, are these contemplated changes enough to get Argentine economy out of the basket? Will it be back on track even if Argentina solves its outstanding default issues with the Paris Club? Should global financial agencies bail Argentina out again? The answer is a resounding no from us. And one of the primary reasons is because the Argentine government seems to be lying on the face about certain economic indicators, seemingly to get a favourable market standing. For instance, inflation has been ‘officially’ hovering around 9% since 2006. But it was privately estimated at 12-15% that year and over 15% in 2008. Another reason is that while the social, demographic, and economic indicators place Argentina among the most developed nations in Latin America, it’s also characterised by highly contentious domestic politics and a history of political uncertainty and governance problems that have ruined the country’s economy time and again. But most importantly, and the third reason, is that over the years, Argentina has somehow accepted the culture of economic collapses (seven times since 1930). Gabriel Torres, Vice President at Moody’s tells us, “Our concerns [also] center on Argentina’s willingness to pay and its policy disarray, as evidenced by the outstanding defaults and the under-reporting of inflation data (40% of its debt is indexed to inflation).”

Today, Argentina has declined from its noteworthy position as the world’s 10th wealthiest nation (on per capita basis) in 1913 to the world’s 36th wealthiest in 1998 to 66th in 2008 (But as per official data, those living below the poverty level has declined from around 57% in 2002 to 15% now). In fact, the economy shrunk 0.8% year-on-year in the second quarter of 2009, the first yoy decline since the 2001 default. Though President Christina has so far averted a full-blown recession in the nation (quarter-on-quarter growth was marginally positive in the first two quarters of the year) and might avoid an outrightrecession in 2009 as well (as the economic activity index, IMAE, increased 0.1% year-on-year in August after contracting in the previous three months), the situation, as economist Juan Pablo Fuentes tells B&E, could change anytime in the second half of the year. The Argentine government had not responded to B&E’s queries by the time this went to print. But with Argentina’s total debt, not counting that held by the holdouts, now aggregating more than $140 billion (almost 50% of GDP), we guess we really don’t need a response anymore, do we?


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