ARGENTINA: The big squeeze

There is no immediate end to Argentina’s longstanding debt problem, which threatens an even worse impact on the economy

  • By Charles Newbery
  • 11 Oct 2013
Email a colleague
Request a PDF
In September, Argentine president Cristina Fernández de Kirchner gave two interviews to the media, a novelty after six years of speaking mostly from the podium. While sparse on thorny questions, the interviews come as the president seeks to revive support.

Her Front for Victory party got 26% of the votes in the August 11 congressional primaries, far less than the 54% that swept Fernández to a second four-year term in 2011. Polls suggest a worse result in the October 27 election, prompting analysts to start pronouncing the end of the Kirchners and what Fernández calls "the victorious decade".

The Kirchner rule began in 2003 with Fernández’s late husband, Nestor Kirchner. The economy recovered from a 2001–02 collapse to grow 8% a year through 2011, thanks largely to the rebound from crisis lows and record prices for its chief export: soybeans. But manufacturing capacity didn’t keep pace with the boom. Shortages hit and prices rose. Instead of cutting costs, encouraging investment or slowing consumption, the government expanded social welfare spending, maintained energy subsidies and signed off on increasingly large wage hikes. They introduced price controls to try to contain inflation and threatened to fine companies if they didn’t ramp up production.

Things have worsened since 2012. The economy has slowed to less than 3% growth, while the fiscal surplus has fallen into deficit; energy shortages have increased, central bank reserves have dropped and the trade surplus has narrowed. With inflation now touching 25% annually, three-quarters of the electorate wants change.

Fernández didn’t foresee the growing disapproval. Ensconced in a tight circle of advisers, she was fed half-baked information and "lost touch with society", says Carlos Germano, a political analyst. She fielded the little-known Martín Insaurralde to lead the party ticket for national deputies for the province of Buenos Aires, home to 38% of the nation’s electorate. He proved no match for Sergio Massa, the young and charismatic mayor of Tigre, a district outside the capital. A former chief of cabinet for Fernández, Massa used his campaign to expose the government’s failures to tackle inflation, reduce taxes and clamp down on crime.

Before undergoing brain surgery for a hematoma discovered following a previous injury, Fernández was seeking to reel back voters with tax breaks, a tougher stance on crime and by speaking to the media. "You can see that she is making a special effort to be affable and approachable," says Francisco Resnicoff, a political analyst at Cefeidas Group, a risk-analysis firm. "She took the election defeat as a castigation of her style of permanent confrontation."

This style, encapsulated in the slogan "we’re going for everything," gained a following by demonstrating strong leadership, national fervour and resentment toward the pro-market economic policies widely blamed for the 2001–02 economic crisis.

But the Kirchners failed to take advantage of the boom years to fully settle a $100 billion debt default and fix an expanding roster of economic problems. They focused on deepening a model of social inclusion, or pulling the poor into the mainstream through welfare programmes. As spending rose faster than revenue, Fernández jacked up taxes on farmers, nationalized the private pension funds and began siphoning hard-currency reserves from the central bank to cover costs and pay the national debt. Her administration plans to use a record $9.86 billion of reserves in 2014.

"They got trapped in the boom," says Mark Jones, an expert on Latin American politics at Rice University in Texas. When problems surfaced, they reacted with "patches to try to manage the crisis instead of addressing its core causes".


By comparison, Brazil, Colombia and Uruguay tempered social spending with financial pragmatism. Luiz Inácio Lula da Silva, Brazil’s president from 2003 to 2011, increased taxes to fund social programmes "but not in a way that caused businesses to flee or stop investing", Jones says. "What the Kirchners do is they squeeze and they squeeze, and when the orange is completely without juice they go on to find something else to squeeze," he says. "It’s always, who’s next?"

The next squeeze could be on Argentina. The country is still in default on about $10 billion owed to the Paris Club of creditor nations. Another $10 billion or more is owed to creditors who held out of a voluntary restructure of the $81.8 billion of bonds from the 2001 default.

This has exposed Argentina to legal challenges from hedge funds seeking full repayment of bonds they picked up at less than the 30 cents on the dollar that 93% of creditors accepted in the 2005 and 2010 restructures.

The holdouts could succeed. The US courts have ruled that Argentina must pay holdouts seeking $1.33 billion at the same time they pay the restructured bondholders, citing a pari passu clause requiring equal treatment for all creditors. Argentina lost an appeal and asked the US Supreme Court to hear the case. On October 1, the high court deferred a decision on either hearing or rejecting the appeal.

Argentina still has time to manoeuvre. Richard Samp, chief counsel of the Washington Legal Foundation, estimates that it could take until March 2015 before a final ruling. In the meantime, Argentina won’t have to pay the holdouts because the appeals court issued a stay until the Supreme Court issues its decision. "It is in Argentina’s best interests to string things out as long as possible because the status quo is maintained as long as this lawsuit continues," Samp says.

Negotiations with the holdouts could then change after a most favoured creditor clause expires on December 31, 2014. Argentina wrote the me-too clause into the restructures to assure participants that if it were to give better treatment to another creditor then they would get the same. When the clause expires, Argentina won’t have to pay the restructured bondholders extra if a more beneficial settlement is reached with the holdouts.

Will the president make such a settlement with the holdouts? So far she has shown no intention of negotiating with these creditors she has come to call vultures for trying to get "astronomical" returns from the country’s downfall.

Instead, she has focused on reducing the foreign debt to less than 13% of GDP – excluding that in arrears – from 54% in 2001 to remove Argentina from what ruling party congressman Eric Calcagno calls a trap that drains resources and binds national economic policy to foreign creditors and the International Monetary Fund.

To change this, the Kirchners used central bank reserves to pay off the country’s $9.6 billion debt with the IMF in 2006. This effectively severed its ties with the Washington lender, which the Kirchners blame for forcing austerity measures on Argentina that they say slowed growth, cut jobs and drove up poverty while pushing Argentina so deep into debt that the 2001 default became inevitable.


The government hasn’t wavered in its opinion. Calcagno calls the holdouts’ lawsuit "an unacceptable act of financial terrorism". He says that the only option for the holdouts is to accept the same terms as the 93% because anything more would be "unfair" and impossible to pay because it would trigger the me-too clause for the exchange bondholders.

This has fuelled expectations that Argentina would choose to default if the payment orders were enforced. "Argentina doesn’t have the money, so that is why they are going to delay things," says Rodrigo Olivares-Caminal, a professor of banking and finance at University of London.

To avoid default, Fernández has opened a third opportunity for the holdouts to swap their defaulted bonds under the same terms as the 93%. This has gained support from opposition parties. "It is ridiculous that 7% of the foreign creditors get more than the rest," says Federico Pinedo, an opposition congressman.

Even so, he says the government mismanaged the lawsuit and its relation with the US justice system. Argentina’s stance never to pay a peso to the hedge funds irked the courts and led them to harden their sentences against the country, he says. On August 23, an appeals court referred to Argentina as "a uniquely recalcitrant debtor" when it upheld a district court order on Argentina to pay the holdouts when it pays its restructured bonds. Fernández shot down the claims, saying the country is "a serial payer" because it has paid the exchange bondholders religiously.

Pinedo says the third bond swap, which is for an unlimited window of time, demonstrates Argentina’s willingness "to pay everybody and pay everybody the same". He says he expects some of the holdouts to participate. But not all will. If they have already rejected the same terms in two swaps, "why would they change their minds now?" Olivares-Caminal says.

A bigger mistake in handling the holdouts lawsuit came when Fernández made it a national cause, says Federico MacDougall, an economist at the University of Belgrano in Buenos Aires. "She has created an epic battle out of a minor fight, and this has cost her room to manoeuvre against extremely professional creditors, who know how to fight against defaulters and some of whom have time on their hands."

Even so, the strategy has its pros and cons for the president. The opposition – and her own party – will jump on her if she makes any concessions to the hedge funds. So by portraying them as bottom-feeders, she is preparing her own defence in the event of a default. "It won’t be her fault; it will be somebody else’s," says Olivares-Caminal.

The strategy, however, is backfiring for the economy. Unable and unwilling to borrow abroad, monetary expansion will continue at around 40% per year, to fuel inflation, while international reserves dwindle. Forecasts suggest the reserves could dip below $18 billion at the end of Fernández’s mandate in 2015 from a record $53 billion in January 2011.

That would leave the next administration taking office in December 2015 in an even weaker position to deal with the holdouts and the Paris Club.

Fernández "will string this out as long as possible, and if they have to go into default, they will go into default," says Jones of Rice University. "It will be the job of whoever takes power in 2015 to deal with the mess. She is going to let that person pay the political cost of being seen as yielding to the vulture funds."

  • By Charles Newbery
  • 11 Oct 2013

All International Bonds

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 JPMorgan 144.72 488 10.06%
2 BofA Securities 116.53 399 8.10%
3 Citi 111.31 395 7.74%
4 Goldman Sachs 88.15 252 6.13%
5 Barclays 75.38 304 5.24%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 Deutsche Bank 8.33 35 7.62%
2 BofA Securities 7.00 27 6.40%
3 UniCredit 6.71 30 6.14%
4 BNP Paribas 5.11 35 4.67%
5 HSBC 5.06 31 4.62%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 Credit Suisse 3.10 7 10.48%
2 Morgan Stanley 2.55 14 8.63%
3 JPMorgan 2.53 18 8.56%
4 Goldman Sachs 2.43 15 8.20%
5 Citi 2.07 16 6.99%