An Argentine friend queried me about Argentina’s debt default yesterday asking me for my thoughts on the subject. Here is my reply in the form of an open letter to my friend and to the Argentina government should they be interested. They should.
The above introductory comments are from an email received by munKNEE.com from an acquaintance who asked that I broadcast his insights to as extensive an audience as possible in hopes that there might be better days ahead for the average Argentine.
The open letter is as follows:
To all concerned,
Who was right in the Argentina vs. U.S. Supreme Court decision?
‘Right’ can be viewed from a legal and moral perspective. Because I’m not a lawyer, I can’t speak with authority on whether the U.S. courts made the right legal decision but from a moral perspective, however, a borrower should pay his debts. Argentina borrowed money and then said it would not repay according to the agreements. The country, because of its power, was able to force the lenders/creditors, such as Italian pension funds, to accept the terms which Argentina arbitrarily offered/imposed.
It is my understanding that the lenders, representing 92% of the debt, reluctantly accepted the Argentine government offer of only 30%. In other words, those lenders lost 70% of their money and probably more given that the debt in being repaid in installments over many years. Interest rates and inflation of currencies over time probably means the creditors are actually getting even less than 30% of the money they lent to Argentina. I think these are the facts.
What strategy should the Argentine government now take?
If you were to have asked me what strategy the Argentine government should take, following the U.S. Supreme Court decision that forces Argentina to pay 100% of their debt to the 8% of the creditors who did not accept the original 70% ‘haircut’, I would have advised Argentina to do exactly what they did yesterday – default and not pay.
Why default and not pay?
Default and not pay? Why?
- Because it appears that Argentina would also have to pay the other 92% of the bond holders the same amount/the full amount, not 30%. Obviously, that’s not a good deal for Argentina!
- Because it has little additional reputation to lose by telling everyone to ‘stuff it’. The country’s reputation ‘sucks’ internationally. The country is considered to be a ‘deadbeat’ financially in that it has a habit of acting badly financially. With all the reading I do, I can say with total confidence that Argentina is always cited as the ultimate example about how a country should NOT act. Internationally, it is a ‘poster child’ in how not to govern. Given this reality, it had little additional to lose in doing what it did.
The government of Argentina should take this event and turn it into a positive. How?
- The country needs to seriously devalue its currency in order to be
- much more competitive in their exports and
- allow direct foreign investment on more favourable terms. In other words, foreign investors get more for their investment dollars/Euros/Renimbi/Yen, etc.
All of this would make for a more vibrant economy, with more jobs and tax dollars but one problem remains. The Argentine voters don’t like devaluations because it reduces their standard of living.
How could Argentina find a way of selling a currency devaluation to their citizens?
The Argentine government could:
- Blame the ‘vulture’ hedge funds for being ruthless and unfair.
- Best of all, blame the United States and it courts for making the life of regular Argentine people painful.
- In other words, use this event to find ‘scapegoats’ – countries, institutions and literally anyone but themselves (the Argentine government) for these problems.
Done skillfully the government could ‘sell’ these reasons/excuses to Argentine voters.
- After an uncomfortable transition period of perhaps two years, the economy would improve dramatically and
- prosperity of the kind that took place at the early stages of the Kirchner era would take place – again
- until the government once again screwed up by implementing many of the same selfish and short sighted measures they did during the last cycle.
Your country has so many advantages it takes real skill and determination to mess things up as badly as the government routinely does. There seems to be a special talent within the Argentine government that finds a way to avoid almost guaranteed universal prosperity and successive governments have demonstrated that they have that talent.
We all should cry for the unfortunate victims of these perverse policies …most of the regular citizens of Argentina.
With international reserves in virtual free-fall, the black market peso rate plunging, and no sign for months that President Kirchner has any appreciation at all of the gravity of the situation, the country is in the advanced stages of another financial panic/meltdown. This will end badly, another chapter in the long history of Argentine financial crises extending back almost 100 years. Read More »
One can barely keep up with what is going on here in Argentina, since each day brings more ‘new’ government dictates, rules and initiatives which all seem to share the same features – dumb and dumber – and virtually all with guaranteed unintended negative consequences. Let me give you my on-the-ground insights of the lay of the land – of what is REALLY happening in Argentina – and about to happen! Words: 853 Read More »