Global Investing

A Plan B for Argentina

What’s Argentina’s Plan B?

President Cristina Fernandez de Kirchner has said she will sell the presidential palace in Buenos Aires, if need be, to keep paying creditors who agreed to restructure the country’s debts.  But it may not come to that. Warning: this is a complicated saga with very interesting twists.

A pair of hedge fund litigants demanding $1.3 billion in payments and a New York court are making it hard for Kirchner to keep paying international bondholders. But she might contemplate asking those existing creditors to swap into Argentine law bonds, to which the writ of the New York court will not extend.

First some background. Argentina is due to pay bond coupons this week and in June. Looks like the hedge funds will decline the payment proposal Argentina made last week; this could lead to a default.

Most investors reckon this week’s payment is safe and that the crash will fall in June.  Argentina pleaded in the NY court that its own laws prohibit it from paying more to the hedge funds than it pays other creditors. Out of court it is less polite, calling the two hedge funds vultures. See here for more.

So, back to a putative Plan B. Deputy President Amado Boudou said this weekend Argentina would find a way to pay the exchange creditors irrespective of the outcome of the court hearing. That has supported bond prices. But it also suggests he may resort to local law bonds. That option, in principle, may look attractive to creditors who might otherwise find themselves holding defaulted debt again. In reality, the switch may be tough to do. Why? Here’s what Stuart Culverhouse, head of research at Exotix in London says:

Argentine CDS spiral on “peso-fication” fear

Investors with exposure to Argentina will have been dismayed in recent weeks by the surging cost of insuring that investment — Argentine 5-year credit default swaps have risen more than 300 basis points since mid-May to the highest levels since 2009. That means one must stump up close to $1.5 million to insure $10 million worth of Argentine debt against default for a five year period, data from Markit shows.

The rise coincides with growing fears that President Cristina Fernandez Kirchner is getting ready to crack down on people’s dollar holdings. Fears of forcible de-dollarisation have sent Argentine savers scurrying to the banks to withdraw their hard currency and stash it under mattresses. That has widened the gap between the official and the “black market” exchange rate. (see the graphic below from Capital Economics)

While government officials have denied there is such a move afoot, Fernandez has not helped matters by exhorting people to “think in pesos”.  That will be hard for Argentines, most of whom have vivid memories of hyperinflation, default and devaluation. Unsurprisingly, most prefer to save in dollars.