The risk of flirting with a new default (Editorial) La Nacion Friday, March 8, 2013

The risk of flirting with a new default (Editorial)
La Nacion
Friday, March 8, 2013

Argentina could approach a new default on sovereign debt.  It would not be the first time that it has occurred: our country already went through that situation in the years 1828, 1890, 1982, 1989 and 2001. Also in the Kirchnerist era, in 2007, when a selective default was imposed on the holders of debt indexed by the rise in the cost of living, beginning with the falsification of INDEC’s statistics.  By confirming a new sovereign non-compliance in 2013, Argentina will rack up the very strange record of generating a situation of non-payment for the third time in only 12 years, without having suffered a war or a natural catastrophe.
The countries use restructuring or a moratorium of their debts as the last resort of economic policy.  They do it when the costs that continuing to service obligations under agreed upon contractual terms has a cost that is no longer viable.  That could happen because they have lost access to financing or also because the social cost of generating the sufficient tax resources to keep the debt current is provoking a negative impact in the short term of such magnitude that it surpasses the long-term benefits of keeping a clean credit history.
In this case, a likely default by Argentina could come if our country gets an adverse ruling from American court around the case that the bondholders have brought forth, who didn’t accept the swaps of 2005 and 2010.  If Argentina doesn’t accept the honoring of that sentence, it could see itself then impeded from getting corresponding funds to the payments to bonds emitted under New York law in the swaps mentioned earlier.
By analyzing the possible solutions to this conflict, one must take into account that the bonds in default didn’t include clauses that allow our country to modify the amount owed to the holders of those assets.  That makes it hard to find a point of agreement among our authorities, who plan to impose the same haircut on the rest of the bondholders, and those who are litigating, who believe our country must acknowledge the original capital owed plus interest contractually owed since the date of emission of those bonds.  That point of view of the creditors has been backed until now by rulings of the lower and upper courts in the United States, while it has now opened the possibility that our country could present a payment plan, with a deadline of March 29, to defer over time the amount to be paid to those bondholders.
However, that intention to bring the parties together by American courts could fall into the abyss if our authorities decide to unilaterally limit the menu of options to the reopening of the swap of 2010, which was already rejected by the holdouts and that, also, violates the interpretation of equal treatment of the creditors (pari passu) which until now the New York court has adopted.  Supposing that Argentina can reverse the successive rulings of two instances of justice by presenting a reopening of the swap under 2010 conditions is from a innocence that is difficult to comprehend.
Everything seems to indicate, however, that the authorities have chosen this path.  At least from what is understood from President Cristina Fernández de Kirchner in the opening of the Congressional sessions.  She explained that in the bankruptcies of companies the conditions of payment by two-thirds of creditors is sufficient to impose that treatment on the rest of the debt holders.  That is absolutely clear in Argentine law.  But that is not applicable to a sovereign restructuring when the country has submitted to New York legislation.  Also in this case, like in so many others, the President again confused the concept of legality with legitimacy, defining the latter by unique desires and shifting whims of the caudillo, in this case, herself.
The menu that opens before Argentina to present  on March 29 is infinite.  And that proposal, worked upon with intelligence and imagination, could solve the squaring of the circle: to attend to the Nation’s capacity to pay, to offer a proposal that allows the holdouts to finalize this interminable lawsuit, and allows the American courts to ratify an agreement consistent with the governing law of the United States.
But it’s likely that such a way out will not be taken.  If that were the way the government functions, inflation would be less than 10%, INDEC would not be falsifying data, regulatory frameworks of public services would show clear rationality, foreign policy would not be unhinged, and the trains wouldn’t be worse than some of the poorest countries in Africa.
It’s likely that for the government, the only acceptable solution is the unconditional surrender of the so-called “vulture funds”, in a contemporary re-issue of “if they want to come, then come, we will join them in battle,” of General Galtieri.  To comprehend that the bondholders will not surrender just because the Argentine government wants them to, and admit that the costs of a default on growth, employment and the distribution of revenue would be enormous, it would help perhaps that the focus of the government acquire a certain professionalism.
The main impediment for ending the conflict with the holdouts is that the government is prioritizing the media battle with the creditors over channeling its energy towards seeking a technical solution.
It’s highly unlikely that the Kirchnerist government would go back to emitting bonds under foreign legislation, be it New York or London.  It would mean falling back into the same legal trap that a disassociation is creating today, in the view of the government, from the meeting point between a legal and legitimate solution for the debt issue.  And for the creditors, to accept submitting to Argentine law would present incalculable risks, due to the elevated level of politicization of the debt issue in our country.
Beyond those technicalities, the economic costs of a default would be enormous.  What isn’t clear is that such cost would surpass the population temptation for conflict.  Especially when a populist government finds itself with two very easy stereotypes to classify for the simplicity of its minds: financiers and foreigners.  A very tempting combination to try to confront and, eventually, hold responsible for a new crisis and a renewed frustration for Argentina.
El riesgo de coquetear con un nuevo default

http://www.atfa.org/the-risk-of-flirting-with-a-new-default-editorial/