The debt restructuring issue will not be resolved within U.S. courts or this year.
Anyone betting on Argentina's ability to run the debt default clock into overtime and achieve a favorable resolution to its debt predicament in 2014 is likely to be disappointed. Renegotiating $15-20 Billion of debt is not something that can be done quickly.
In soccer, a match almost never lasts only 90 minutes. That is because unscheduled stoppage or injury time can be added at the officials' discretion to the end of each half of play.
The court battle between Argentina and 'los fondos buitres', the vulture funds, it is clear there has been significant injury on both sides. With the second-highest inflation rate in the Americas, an economy in recession and still suffering from the massive currency devaluation this year, Argentina did not come to this match in its best condition. It has every incentive to get this debt restructure case behind it as soon as possible.
The game changer yesterday would have been the granting of a stay from the judge's last ruling to avoid a selective default. This stay was actually something the funds were more than willing to provide - for a fee.
Normally, a country the size of Argentina's would reach into its foreign reserves of $29 billion, create some new bonds to pay off the old debt and be done with this $1.3 billion nuisance suit. The challenge here, according to the Argentine administration, is that paying 1% of the debt holders could cause 100% of the monolithic settlement for their 2001 default to tumble, crushing the economy in the process. Therefore, the only immediate exit strategy that Argentina offered was an immediate participation in the 2010 deal - a 300% profit. This was an offer investor-plaintiffs could afford to refuse and did turn down.
The response from Standard and Poor's was equally negative. At approximately 4:38 PM in New York, credit rating agency Standard & Poor’s lowered Argentina’s foreign currency rating to SD, or selective default, for missing a $539 million interest payment on its Discount bonds maturing in 2033, after a 30-day grace period expired.
Today, the sun will rise over Argentina for the eight time in default status.
Now, in fairness to our Latin American neighbors, it is important to point out that the U.S. government has a history of defaulting also. In November of 1814, a few months after the British sacked Washington DC, during the War of 1812, the Treasury was unable to move enough precious metals to service its debt. Again, a second default happened in the spring of 1979 under Jimmy Carter, when the debt ceiling was $800 billion of debt. That $120 million of missed payment, a back office glitch, cost billions of extra interest expense on the entire debt outstanding as interest rates rose.
The reason this Argentina story is of such interest now is that a victory for the holdouts could strengthen creditors’ rights in other markets. This could make governments think twice before taking on debt that may turn out to be unsustainable. In effect, a small group of litigious hedge funds may also have ushered in a new more stringent era in debt markets that could frustrate a country’s efforts to get back on its feet after an economic crisis.
In their own defense, the Argentina holdouts assert that they do not go after countries that cannot afford to pay their debts. Governments that renege on their obligations are also often corrupt. They note that Vice President Amado Boudou of Argentina is involved in a corruption case for allegedly receiving bribes and conducting business incompatible with public office. He was once considered a likely successor to Cristina Fernández de Kirchner.
In the meantime, the interest in Argentine equities is overdone. Mercadolibre (NasdaqGS:MELI), Banco Macro (NYSE:BMA), Cresud (NasdaqGS:CRESY). Petrobras Argentina (NYSE:PZE) and Telecom Argentina (NYSE:TEO) are all likely to give back yesterday's gains.
My take on all this is that defaults are not predictable but they make for very predictable political theater.
Stay tuned for more Argentine defiance of U.S. courts and some very predictable damage to Argentina's creditors and investors - whoever they are.
Until next time ... Happy Trading!!