Consequences of the American ruling: a new default?
Tuesday, November 06, 2012
By Agustín Monteverde
The recent decision from the Court of Appeals of New York, in addition to siding completely with the plaintiffs, put them on par with the holders of bonds emitted in the swaps of 2005 and 2010. Argentina couldn’t pay these holders without simultaneously or previously paying the holdouts, who rejected at the time the offer of restructuring and took action in New York court.
Judge Thomas Griesa now must decide the form of prorrata – which is to say, what proportion the disbursements from the government will be distributed among the two parties, plaintiffs and holders of post-swap bonds – and establish the roles of intermediary banks and third parties. The pay agent (Bank of New York, or any other that is designated) cannot limit itself any longer to following the instructions of the Argentine government, but will be subject to the orders of the courtroom. The judge has expressly established that all diversion of funds will be illegal and would place the government and its intermediaries in the status of contempt; also, this maneuver would not save it from a default on its post-swap bonds, except if they change the original conditions of the emission with the authorization of 85% of the holders.
This new scenario presents an extraordinarily serious situation: starting now, the non-compliance with the holdouts directly affects relations with the holders of the swap bonds emitted under foreign legislation. The payment to these bondholders could be attached if the order is not complied with. If Griesa rules in the coming days, part of the funds that will be disbursed in December – there are payments due on the 2nd, the 15th and the 30th – could go to the litigants.
An eventual attachment would mean a new default, in this case with the bondholders that accepted the swap, who wouldn’t get all the money deposited. This would turn into an authentic financial catastrophe, as it would allow for the acceleration of the principle sum – the expiration of all maturity dates – and that would be a situation that would be impossible to honor.
In reality, it’s important to note that Argentina didn’t abandon its state of selective default at any time in the last ten years, as it maintained the cessation of payments with the holdouts and the Paris Club. At the same time, it didn’t respect the arbitration decisions against it and defrauded the creditors in pesos by manipulating inflation rates.
But it’s undeniable that starting with this judicial resolution the risk of a wide default on the restructured debt has seriously increased. If they attach the dollars the government moves to New York for the performing debt, it could enter into default as soon as December.
The greater demand over the critical dollar coffers sows doubt around a possible pesification of bonds in foreign currency under local legislation, which would represent a new default. The weakness of our reserves cannot be disguised. This flaw has been compensated for the moment by prohibitions, controls and criminalization of the currency exchange market. Almost no one can access the (almost) official market, and buying on the parallel market is – in the government’s view – a crime.
Without access to external financing, we finance ourselves by force, exercising it upon internal corporate actors – like is the case with insurance funds and the banks – or applying it over the general population through the unbridled emission of money. The problem is that we emit to finance spending and we also emit to buy dollars.
As those are the same dollars we use to pay debt, every day there are more pesos in the market and less dollars. Today the monetary base rounds out to 267 billion pesos, while the gross reserves – without discounting obligations they carry – are placed just under US$45 billion. If we add up the deposits to the monetary base – that is, the monetary aggregate called M1 – we find a liquid mass of 410 billion. One can observe, therefore, that even taking as valid the gross reserves – we’ve pointed out in many opportunities that the relevant variable is the level of effective net reserves, drastically less – the backing of the local currency today is extremely weak.
It’s time that the government, with prudence and seriousness, take care of the delicate situation that it had brought us to itself. If, on the contrary, it persists in an irresponsible theatricalization exclusively for internal consumption, the end of the party will be imminent and the costs will be paid by all of us Argentines