Red letter day for Argentina comes tomorrow, with the holdout investors and the South American nation coming down to the wire on a potential deal that would offer the holdouts something better than what everyone else agreed to in 2005 and 2010. Without getting into issues of vultures vs. violating debt agreements, the situation probably comes down to three scenarios.
First, Argentina defaults. One cannot underestimate this too much – Argentina has already defaulted before, and the stakes are nowhere near as high for the country as they were the first time. But it is still pretty darned damaging – it puts the country into another level of pariah with international capital markets (double secret probation, and here’s where we once again note that had John Vernon lived, he would have solved this whole mess), it causes even more capital flight from the country and worsens the outlook for the currency, which is already trading at a level much lousier than the going real rate.
The spot rate is about 8.1 pesos to the dollar – its two-decade chart looks like a double-black diamond ski run – while the black-market rate is more like 12 pesos to the dollar. Argentines would likely increase their dollar holdings, and would put severe pressure on foreign reserves, which aren’t all that great to begin with. With inflation at about 30 percent, this isn’t a fun option. As Hugh Bronstein noted in a June story, Argentina is also a big soybean exporter – third in the world – and farmers there plan on hoarding the product in case of a default. The cost of immediate soybean exports from Argentina is up 6.3 percent in the last week or so; similar Brazilian exports are up 5.3 percent, and on the Chicago Board of Trade, soybean futures have risen 4.7 percent.
The second option, and this one is even less likely, is that the holdouts blink in some way. The holdouts haven’t changed their position in some way, and as Dan Bases points out in a story today, their years-long pursuit of payment on similar obligations in Peru, and the fact that this has been going on for 12 years already, suggests they’ve got some serious staying power (nimble trading is great in some markets; in others, the more important characteristic is extreme stubbornness). It’s still unclear just what the holdouts stand to make out of this, but the $1.33 billion-plus-interest judgment in their favor has the Argentines saying that’s a 1,600 percent return, which isn’t a bad day at the office if it all works out.
The holdouts would also be likely to wait until January when certain clauses that would put Argentina on the hook for a lot more money from other undeclared holdouts and then perhaps any bondholders who did negotiate might want to come back and wrangle again and extend the process. Some legal experts say that this clause isn’t going to be triggered by Argentina being forced into paying the holdouts, but try telling the Argentines that. The only recent blow to the holdouts? The hanging judge in this whole thing, Thomas Griesa, allowed the nation to pay certain obligations (or rather, for Citigroup to pay certain obligations on the nation’s behalf) that would have potentially upset a settlement earlier in the year with Repsol – the holdouts argued against this as it cracks the door to other relief somewhere, though of course the odds are pretty thin.
The third scenario, which in some ways seems equally unlikely (we’re starting to think an asteroid will hit the Earth before any other real option), is that there’s some kind of negotiated agreement that allows the exchanged bondholders to say they’re not worried about additional restitution provided they can just get their scheduled coupon payments.
Then, everyone gets paid, there are no additional claims – per what Argentina wants to happen after December 31, 2015 – and the whole thing finally finishes – the hedge funds have their victory, Argentina can claim it didn’t put itself on the hook for any more money than what the judge forced them into paying, and it will all stop there. (And then of course Argentina can sell more bonds in two years or so, because bond markets have shorter memories than people think.)