Writing about Argentina’s economy is sometimes a bit like terrible sex – tedious, monotonous, and makes you want to scream, “Just do it already!”
At least that’s how I feel when I sift through article after article on the what’s happening with Argentina’s bonds and the ongoing court case in New York. I first touched on the subject back in January, when The Bubble was just a twinkle in daddy’s eyes, in an article called On Vulture, Bonds, and Defaults. Surprising no one, in practice very little has changed since that article was written. Argentina continues to make payments on its reissued debt, the vultures and other holdouts have seen neither a penny nor a peso, and banks and financial institutions are continuing to process payments unblocked.
On paper however, a great deal has gone on. Argentina lost the case and the appeal in New York, and has appealed the ruling to the US Supreme Court. The Supreme Court will decide whether or not to hear the case in October 2013. If they choose to review the case, the outcome will be delayed up to two years.
So – please, oh please, oh please Supreme Court, say no and release me from this unsatisfying purgatory!
But seriously, if the Supreme Court declines to review the case, the New York ruling will come into effect in late 2013 or early 2014. This means that the first bond payment to be affected will likely be in June 2014, when Argentina will face the decision to either pay US $1.33 billion to holdouts along with restructured debt holders, or to pay no one and default.
If Argentina pays the $1.33 billion to the holdouts, it’s likely that they will face a series of legal claims that could total close to US $132 billion, or the value of the pre-2001 crisis debt.
Argentina’s current US dollar reserves total about US $36.9 billion, so that’s really not a feasible option.
So – now what?
Argentina has reopened the debt swap option to these holdouts, offering the same approximately 30% of face value received by the other restructured debt holders. This is option is nothing more than an attempt to gain some international pity and perhaps support. The holdouts filing suit are called “Vulture Funds” because their business model revolves around buying defaulted or distressed debt and then suing for full value, so accepting a debt restructure is probably a clear violation of their mission statements.
In the event of a default, it’s a tough call to say what will happen. First of all, about zero people ever will be surprised. I’ll probably yawn and roll over. Secondly, Argentina has issued its more current debt under local law so it will not be directly affected.
The relevant little wiggle to keep an eye on is what will happen to the unofficial exchange rate. Companies and individuals use locally-issued bonds that are traded on multiple markets to move money in and out of Argentina legally and at the unofficial rate. The implied exchange rate on these instruments is what determines how many pesos your dollars demand on the street.
The key pieces to Argentina’s economy are import/export restrictions, subsidies, dollar reserves, inflation, and the parallel exchange rate.
A default would (please God) smack the reserves and parallel rate into some kind of action, although hardly the climax we were anticipating.