Concerns build on Argentine economy
Economists and analysts study possibilities for Argentina to escape debt impasse after default
Amid uncertainty over Argentina's debt, economists
say the prolongation of the sovereign's default could deepen
the country's economic problems.
The government's efforts to maintain international
reserves while boosting growth with expansionary public policy
would be more difficult if default stretches on, said analysts
at Morgan Stanley.
"A prolonged default, in our view, would make
achieving these dual objectives increasingly difficult and
heighten the risk of policy radicalization," they said in a
report on Tuesday.
The country defaulted on July 30 when a payment on
restructured debt was blocked by US courts, which have
ruled that Argentina must pay holdout creditors before it
services exchanged bonds.
Argentina's international reserves, official and
parallel foreign exchange rates and pressure on deposits were
indicators to watch, Morgan Stanley analysts said: "Even if
policy radicalization does not materialize, the economy's
ability to muddle through for another year may be constrained
in several ways, although we agree that the outcome of the
October 2015 election could provide a positive confidence
Already there were signs that Argentine consumers
were taking a more defensive stance, said Eduardo Levy-Yeyati,
chief executive of Elypsis Partners and chief economic advisor
"Judging by the muted impact of the Aguinaldo
[bonus salaries paid twice a year], which typically increases
retail and credit card activity, people are already becoming
more skeptical and risk averse, spending less and compounding
the effect of external uncertainty on domestic demand," Levy
Yeyati told LatinFinance.
The next steps for the sovereign to move out of
default are unclear. Argentina says it cannot pay holdout
creditors in full because it told investors that participated
in previous restructurings that any better terms offered to
other bondholders subsequently would be offered to all.
The country could ask creditors to waive the
relevant clause, known as the Rufo. Such a move would require a
supermajority of holders of each series.
"I would have expected the government to move
forward with the Rufo waiver, which shouldn't be hard to get
given the disposition of many large holders to avoid a
default," said Levy-Yeyati.
But it was unclear whether the government would
accept the demands of holdout creditors after the Rufo clause
expires at the end of the year, he said: "The key question is,
will they pay in January? I think that's the question that
everybody is asking right now. Is the Rufo scare a reason, or
an excuse? So far the evidence is consistent with both sides.
They even argue that if they look for a Rufo waiver, the clause
might be activated."
The government could choose not to settle with
holdout creditors, said Jan Dehn, head of research at Ashmore,
meaning the impasse could stretch on as long as the government
stays in power.
Separately, the International Swaps and Derivatives
Association ruled on Tuesday that a repudiation or moratorium
event had not occurred in Argentina. That followed another
request by law firm Shulte Roth & Zabel to consider the
question, which had first been put to the organization in June
when Argentina's economy minister said it would be "impossible"
to pay bondholders. ISDA ruled last week that a failure to pay
credit event had occurred, however. LF