How often how you been in a supermarket or a department store and have seen the sight of a mother with a child screaming, while the frustrated mum is shaking and snapping at the child to shut up – an exercise in TOTAL futility. Now imagine a supreme court condemning a bankrupt country to pay a set of bondholders in full, in the clear knowledge that it cannot afford to do so. Also an exercise in futility and a Pyrrhic victory indeed.
I have been watching the Argentina case which was brought by a cabal of hedge funds (and led to the rather comical seizing of the Argentinian training ship Liberdad in Ghana eighteen months ago). I have little time for President Cristina Fernandez De Kirchner who somehow appears to see herself as a reincarnation of Eva Peron and who has been pursuing that very Latin American form of government-by-populism at all cost, affordable or not, which, when it fails, is instantly blamed on any foreigner within striking distance.
Like General Galtieri in the 1980s, she has had a crack at playing the “Las Malvinas” card. Bridge players learn that a trump is only powerful when held in the hand and when played it becomes just another card. Thus, the Falklands issue is only good to her so long as the islands remain British. If Argentina were ever to make good its claim, it would remove one of the largest and most valuable rallying cries from national politics. In other words, if they were to change hands, they would lose all the value they have and they would go to the dogs. Let’s face it, unless oil is struck in a very major way, which so far it has not been, the islands would be just another burden for an already bankrupt country. I digress.
I do wonder exactly what power a US court should have to determine whether a foreign sovereign nation can or cannot declare its ability to pay its debts. “I’m afraid I have to default on these bonds.” “No you do not!” “Naff off, Gringo…” Hmmm?
Strictly speaking, the US Supreme Court did not find against Argentina, it merely decided that it would not hear the country’s appeal against a lower court decision which obliges it to pay certain bonds in full despite it having restructured the majority of the rest of its outstanding bonds. The argument was as to whether a certain set of bonds could and should be treated differently. Should it meet the demands of the bondholders in question, it will have to default on its already restructured debt and the markets yesterday reacted accordingly with discount bonds dropping eight points on the news and the Argentina Merval stock index plunging 10% in a day.
President Fernandez de Kirchner has tried to reassure markets by declaring that the country will not comply with the US court ruling but that it will continue to meet its existing obligations under Paris Club rules. She alluded to the settlement which was reached between her government and Repsol in the aftermath of the totally mad nationalisation of YPF, albeit that she conveniently forgot to mention that the Spanish energy group was paid out in domestic peso debt and not in dollars – only a minor matter if you’re president of Argentina but not if you are a Repsol shareholder.
Supranational
As odious as I find Madame President, sauce for the goose is sauce for the gander and having railed against the willy-nilly fining of European banks – the BNP issue is still in contention – I do wonder exactly what power a US court should have to determine whether a foreign sovereign nation can or cannot declare its ability to pay its debts. “I’m afraid I have to default on these bonds.” “No you do not!” “Naff off, Gringo…” Hmmm? Cross default and pari passu is fine and dandy in theory, but if Argentina’s coffers are empty, which they more or less are, then there’s not much to discuss.
I do not think the country will be pushed into renewed default just yet, eventhough it continues to live beyond its means but it has done so for decades if not centuries. I can’t see this particular leopard changing its spots. It will of course default again, just not quite yet.
Overall, markets were subdued on Monday; the Argentina story broke into an already flabby environment and is just another example of underlying issues of indebtedness which have plagued us for some considerable time having been glossed over by the prolonged period of ZIRP but neither having been addressed properly nor in a meaningful fashion resolved. Sooner or later they were going to burst to the surface again. Argentina is in many respects just the tip of the iceberg.
Sceptics are always looking for the straw which will break the camel’s back in terms of the risk asset rally and there is a feeling that the top might in fact now have been reached – Argentina or no Argentina.
Watch carefully; it might finally be time to start dusting off the “sell” button but it is surely too early to think of actually pressing it.