Latin America Advisor

A Daily Publication of The Dialogue

Is Macri Trying to Do Too Much, Too Soon in Argentina?

Argentine President Mauricio Macri’s government started negotiations Jan. 13 with creditors to end the country’s protracted dispute over repaying bondholders, which stems from Argentina’s massive 2001 default. What will be the economic and political fallout from a potential deal struck between the government and the bondholders, often referred to by Argentines as “vultures”? Is Macri’s government in danger of doing too much, too fast, as opposed to making changes at a more gradual pace, or is rapid action what Argentina’s economy needs in order to curb inflation and encourage growth? What message would a deal send to international investors?

Claudio Loser, president of Centennial Group Latin America and former head of the Western Hemisphere Department of the International Monetary Fund: “The Macri government seems to think that they can follow a gradual approach to their debt problems, in the expectation of continued confidence in the markets even without a new debt-related solution. The markets view the new administration favorably. However, they will consider any delay in dealing with the holdouts as an extension of the default, and not as a compelling financial need or a part of a constructive strategy. Continued delays will preclude new significant flows, and continue litigation. If the government follows a step-by-step approach in their strategy, its situation in the market would remain critical. This will complicate the fiscal adjustment with costs that far exceed those related to a quick settlement. While ratings agencies can promptly re-grade Argentine paper if a cooperative solution is quickly put in place, such an upgrading requires much more than promises for future action. Thus the government needs to act swiftly. The payment and refinancing of the obligations in dispute will not increase the debt of Argentina. It will only increase the officially registered debt, because the government did not recognize the liability that was already legally sanctioned. When the conflict is solved, payments to other creditors can proceed smoothly and the borrowing costs to Argentina are most likely to decline sharply. In this regard Argentina can only win with a quick settlement. Any alternative outcome entails that the country remains cut-off from financial markets, with a loss of confidence and high real costs to the country.”

Mario Rapoport, professor of economics at the Universidad de Buenos Aires: “The issue of the aptly called ‘vulture’ funds transcends the case of Argentina. They are contrary to the restructuring of sovereign debt in a highly indebted world. The acquisition of local debt when it falls in value and in many cases is in default, aided by the U.S. courts, is a mockery of countries’ sovereignty, including legislation of the United States itself, that initially judged this maneuver to be fraudulent. This is a position that was later reversed through the actions of these same funds. Paying off this debt will not help our countries to receive new investment, because although they can diminish vested interests (with the ever-present risk of rising debt levels such as in the 1980s, which caused crises in Latin American economies), such an action also complicates future debt restructurings. If investors want a full guarantee on their investments, they won’t be able to get them because involved countries will implement clauses so that history doesn’t repeat itself. No one will want such cases to be resolved under U.S. jurisdiction, and countries will try to enforce contracts locally or in other countries. At the same time, the United States was the origin of the 2008 economic crisis, in which important financial companies such as Lehman Brothers went bankrupt. What legal security exists in that country? In the 1940s, there was discussion of good capital and bad capital. Good capital is that which creates companies or introduces new technologies in developing countries. This is welcome as it creates wealth. However, the predominant financial capital coming in, in recent years, has been bad capital, such as that of the vulture funds. These funds are killing any willingness of developing countries to attract productive capital from the United States. Or does that kind of capital no longer exist?”

Julio Darío Burdman, president of the Observatorio Electoral Latinoamericano: “Reaching a deal with the holdouts, or ‘vulture’ funds, forms part of President Mauricio Macri’s strategy to return to being able to place debt in the international markets or obtain bank credits at a cheaper rate. Although these funds have a bad international reputation, the Argentine government cannot make financial transactions freely while weighing potential litigation and the potential freezing of assets as a consequence thereof. Also, the rating system for sovereign risk punishes Argentina as it is hindered by its 2001 default. Macri’s willingness to discuss this issue in Judge Griesa’s courtroom shows his intention to open the door for international debt placements. There is, however, a policy restriction: due to the country’s problems with debt in the past, indebtedness has a bad image in Argentine public opinion. Unlike what occurs in other countries, where matters relating to the public debt are not a public issue, they are in Argentina. Much of the population is aware of the issue and rejects it. Therefore, becoming indebted on a large scale is politically unpopular. Macri will have to be careful if he wants to navigate these waters, because there could be political costs. The same thing would happen if he leaves the impression that he cedes too much in the negotiations. For the important international investment sector, this is good news: many investors want to enter Argentina, and having a paved path to use private credit is an incentive. For others, this is perhaps not a big change. In any case, it would be preferable if these hedge funds, which have devoted themselves to litigation, did not to receive such a good deal from Macri’s government, because it would set a bad international precedent. Sovereign credit restructurings would become meaningless if creditors learn that it is better to litigate than negotiate—the whole system would suffer from an increase in distrust.”

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