Argentina’s long slide into economic irrelevance continued Wednesday, when the country achieved its eighth sovereign default.[i] In what seems a likely coincidence (we’ll explain), stocks had among their most volatile days of 2014. Overall, though, the Argentine saga means next to nothing for global markets for the foreseeable future.
For those who haven’t kept up with the trials of one Frontier Market, here is the Reader’s Digest version. Argentina defaulted in 2001. Four years later, they finally got around to restructuring, with most bondholders agreeing to a 67% haircut. But some declined, and they sold their bonds to some hedge funds, and those hedge funds sued for full payment. And won. But Argentina didn’t want to pay. So they appealed. The hedge funds held out, angry words were exchanged, fingers were pointed, threats were issued, Argentinian naval ships were seized by Ghanian authorities, the ships were returned, more angry words were exchanged, and you get the picture. Meanwhile, the Second Circuit Court of Appeals upheld New York Federal District Judge Thomas Griesa’s ruling that Argentina can’t pay one cent to other bondholders until it pays the hedgies, and on June 16, the Supreme Court rejected the final appeal. Time was up.
Argentina, defiant, tried to pay $539 million in interest due its exchange bondholders on June 30, but Griesa made US banks block payment. That opened a 30-day window to reach a deal. The window closed Wednesday, no one was paid, and S&P (the arbiter of such things) put Argentina in “selective default.”[ii]
Usually, this would be very bad for Argentina. Typical defaults mean you get shut out of global capital markets, credibility vanishes, foreign investors flee, interest rates skyrocket and contagion jitters spike. But for Argentina, this just means it’s Thursday. Argentina hasn’t tapped global debt markets since 2001. Foreign investors fled long ago, when the government started nationalizing assets. Credibility vanished around the time the government started lying about economic statistics and jailing economists who begged to differ. Contagion? Bond markets know Argentina’s problems are Argentina’s—most other countries tapping international bond markets aren’t such basket cases. Surprise? Bondholders have known for six weeks they probably wouldn’t get paid on time. They also know Argentina has the money and wants to pay, so they’re patient. Even with a 8.4% drop Thursday[iii], Argentina’s benchmark Merval Index is up 1.7% since June 13, the last trading day before the Supreme Court started the clock.[iv] The financial press has long since exhausted Evita puns.
In short: This is arguably the most feckless and least surprising default of all time. In Argentina today, it’s business as usual. The default is hogging headlines, but only because that tends to happen when life imitates theater of the absurd. This is a political curiosity. Not a global market risk. Yes, stocks globally had a bad day Thursday, but coincidence isn’t causality.
Some claim the real risk comes later: They argue Griesa’s ruling sets a precedent empowering investors who don’t accept restructured debt, which gives investors an incentive not to play along if a country needs to restructure, making it that much harder for the next Greece to fix its finances. Perhaps, but that remains to be seen. And it isn’t as though the holdouts quickly got a ruling and immediately received payment. They have had court rulings in their favor for years. But they haven’t collected a dime. And all those court challenges, ship seizures and other hijinks cost a pretty penny. Threatened default was the only leverage they had. Now they just have unenforceable pieces of paper, giving Argentina every reason to say “or what.” It’s not like Argentina can get sent to collections, a work house or debtor’s prison. Argentina is a country in the 21st century, not a character in a Dickens novel.
At some point, they’ll probably settle, and probably for less than the full amount. That will set a precedent where court rulings yield minimal payments, heavy costs and huge headaches. And other investors would want to imitate this why? Skipping the circus and taking discounted debt swaps up front is just easier. Especially for the banks and institutions who own much of the world’s outstanding sovereign debt. They’d have a tough time arguing multi-year legal battles that yield little are in the best interests of shareholders and plan participants.
Argentina’s default has many things. Like diplomatic intrigue. Academic interest. High-seas adventure. But global market repercussions seem to be more fleeting and fear-based than material and long term.
[i] This outcome seems quite intentional. It takes effort to fail to reach an agreement with creditors who are willing to accept a reduced payment. In Argentina’s case, it took six weeks of stonewalling, issuing bizarre threats, running an ad in two UK papers accusing a US judge of violating international law, a lot of grandstanding, and a lot of mind-changing.
[ii] As Bloomberg’s Matt Levine points out, this technical term is particularly apt since Argentina really did select “default” from its list of many options. Financial pun! What fun!
[iii] Sentiment happens. Oh and this is in pesos. I’d usually quote USD, but currency conversions come at a delay.
[iv] FactSet, as of 07/31/2014.