Are the bad old times back?

This football-mad country waited impatiently for the arrival of the World Cup. But just one day after the first triumph of La Albiceleste (the sky blues and whites, as the national team is called) against Bosnia on 15 June, Argentines heard again the dreaded word ‘default’. It brought back images of the worst period in recent history, of President Fernando de la Rúa leaving La Casa Rosada in 2001, and of millions of citizens protesting in the streets.

President Cristina Fernández de Kirchner reacted quickly. “Argentina is not going to default on its debt and it is willing to negotiate, but let me be clear – it is not willing to be submitted to extortion”, she said in nationally broadcast speech one day after the US Supreme Court had announced that Argentina had to pay the money it owes to the so-called vulture funds.

President Cristina Fernandez de KirchnerSince then talks have been held, but the situation is still very dangerous. On 21 July one of the vultures — the financial group NML Elliot, owned by the tycoon Paul Singer, who has spent over a decade chasing Argentina through the courts – threatened to seize assets held by the Argentine oil company YPF. If agreement is not reached with the vultures by the end of the month, Argentina faces a technical default.

How has Argentina reached this situation?

These vulture funds that now have Argentina reeling against the ropes did not accept Argentina’s debt restructurings between 2005 and 2010 and now claim the sum of US$1.5bn in debt repayment and interest.

Argentina undoubtedly has the money to settle this debt but that’s not the end of the story.  The court judgement affects only a very low percentage of those who rejected the debt restructurings; if Argentina decides to pay them, it will provoke a fierce reaction from the rest of the vulture funds, as they will want to be treated equally. And this, according to the Argentine government, would be unaffordable.

An added complication is that US district judge Thomas Griesa – and it was the decision of the US Supreme Court to uphold his rulings that has sparked off the crisis – has also decided that Fernandez’s plan to isolate the vulture funds was illegal. The Argentine government had been hoping to pay the 92% of bondholders that had agreed ‘haircuts’ (reductions in the value of the debt that Argentina owes)  and get this problem out of the way. Indeed, the Argentine government has deposited US$539 million in a bank in New York to make these payments but the disbursement is now frozen, on the judge’s order.

“In this case, Argentina not only can pay, but it has paid and the payment he been frozen. That is why the term, ‘technical default’, was invented, because it tries to install the idea of a default in something that in reality is not a default but an obstacle from a judge – in an irregular way –so that the bond owners will receive their money”, Hernán Letcher, member of Centro de Economía y Política Argentina, told to Telam.

Not a rerun of 2001

In 2001 the economic crisis that Argentina had faced for years came to a head and, running out of hard currency, the government banned Argentines from withdrawing dollars from the banks in a measure that became known as the Corralito. This measure, taken to prevent a default, actually made things worse and Argentina defaulted in December 2001, as it could no longer service its sovereign debt of US$144 billion. Argentina was forced to accept a huge devaluation of the peso amid protests from citizens who suffered very heavy losses.

The current situation, however, is very different. Argentina has reached an agreement with most of its creditors. After a bitter two-year dispute, it agreed in February to pay the Spanish oil firm Repsol US$5bn in Argentina government bonds in return for 51% of the oil company YPF that Argentina had expropriated. Even more recently, in May, it reached agreement with the Paris Club of creditor nations in a landmark deal that was intended to put the 2001 default behind it and pave the way for an influx of international investment.

The problem comes from the ‘holdouts’,  as the vulture funds are more politely called, which rejected the debt restructuring and have been in litigation with Argentina for years. Martin Wolf, an influential columnist at the Financial Times, said that “if Argentina is forced to pay holdouts in full, the price will be borne by Argentines. This is extortion backed by the US judiciary.”

Future

In the end, Argentina did not win the World Cup and Messi did not emulate Maradona. The dreams of millions of Argentinian people have been shattered and the return to reality has been tougher than expected.

“The Argentine government seems to be willing to default. (…) The government refuses to meet with us, as well as to reach an agreement’, a spokesman of NML Capital, one of the holdouts, said in New York, and added that chances of achieving an agreement are at 50 %.

The Fernandez government firmly rejects this claim. A spokesman said: “Argentina reiterates its intention to negotiate in fair and legal conditions that take into account the interests of 100% of the creditors.” It wants equal treatment for the 92% of creditors who have accepted writing off more than two-thirds of their defaulted bonds’ face value in past debt swaps. If not, it fears widespread revolt.

The deadline is fast approaching. Soon it will be known if Argentina reaches an agreement with its creditors, pays the debt or is declared in default. Even though on this occasion the country is paying its debts, the term ‘default’ is still a trigger for the old nightmares. It will be a scenario the Fernandez government will hope to avoid.