Argentina should be able to muddle through and cover its funding commitments for this year using Chávez’s oil windfall and captive domestic markets. But crunch time is coming in 2009, according to a LatinFinance panel on Argentina’s economic and political future held late January.
“The financial needs of the government are going to be higher next year and that will cause the government to tap the international markets,” says Martin Krause, professor of economics at ESEADE Graduate School and the University of Buenos Aires. “In order to be able to go to the markets next year, they need to start solving the problems now, which is basically the Paris Club and the holdouts,” he adds.
According to ESEADE, Argentina pays 11.0% to Venezuela for funds and 10.3% on 10-year bonds issued in 2007. Similar Brazilian bonds cost just 5.6%. Meanwhile, the sovereign prepaid cheap IMF debt and defaulted on Paris Club obligations that only paid 5.3%. ESEADE adds that the overall debt burden has risen since the 2005 restructuring.
A fiscal surplus will provide around $8 billion to pay interest and a small amount of principal. But Argentina will need to find the rest. Debt obligations are $14.55 billion in 2008, $13.59 billion next year and $11.63 billion in 2010, says ESEADE.
Meanwhile, ESEADE notes that Argentina fails to attract the FDI it used to. It was fifth in the region in 2006, with $4.8 billion, far short of Mexico and Brazil, which both saw almost $19.0 billion in investment. The average in the 2002-2005 period was $2.98 billion, almost 60% lower than what the country averaged in 1970-2005. ESEADE goes on to note that Argentina may be growing faster than Asia, but investment is much lower. For 2003-2006, annual GDP growth was 8.9% in Argentina and 8.7% in Asia, while investment as a percentage of GDP was 22.5% in Argentina versus 36.9% in Asia.
“Dollar for dollar I think our management would say that we get a much better return in India or Korea or places where we have more substantial operations, than trying to restart something in Argentina,” says Douglas Smith, chief economist for the Americas at Standard Chartered. He adds that is partly due to the fact that his bank is much more focused on Asia overall. “Chávez and Argentina gives us plenty of reasons to be comfortable with our decision not to invest more in these places,” adds Smith.
Claudio Loser, senior fellow at the Inter-American Dialogue, calls the Argentina situation “totally unsustainable.” But the sovereign looks set to muddle through. “Luck is still on the side of Argentina for now and for the foreseeable future,” says Pablo Morra, economist at Goldman Sachs.
Squeezed from Both Sides
Externally, Argentina is menaced by $6.60 billion in Paris Club debt, $28.09 billion in holdouts from the restructuring and claims for over $20.00 billion at the World Bank’s ICSID arbitration panel. Internally, it is troubled by bribery scandals and inflation tampering. ESEADE also highlights issues with export taxes, price controls, rates and subsidies, as well as a need to reconstruct capital markets.
Delegates at the Argentina panel said President Cristina Kirchner’s initial hints that she may interested in resolving the holdout situation quickly waned, leaving investors less hopeful of an agreement any time soon. Nonetheless, the American Task Force Argentina (ATFA), the bondholder lobby group, plans to step up pressure through the US government. But it is unclear how fruitful this will be, and progress thus far gives no cause for optimism.
“Regrettably, we haven’t seen any activity since that pre-victory rhetoric,” says Robert Raben, AFTA executive director. “We haven’t seen any indication of a commitment to meet that rhetoric and we’ll be pushing hard for that.” AFTA aims to bring the Argentines to the negotiating table. Raben says Argentina is still seen as a rogue nation and remains in the sights of disgruntled US bondholders.
“Pressure is mounting every day. I think you are going to see a lot more of it in the next few months, in the United States congress, among the United States voters, among various important sectors in this country to get this problem solved,” says Raben. “What you are seeing in 2008 is the problem moving from one of a few private investors who relied on the courts and private overtures to a more public policy question in this country,” he adds.
Besides exerting pressure through trade, international finance or military channels, the only other option open to bondholders is renegotiation or litigation. However, it is very hard to enforce a foreign judgment in Argentina. The litigation option is better done in Argentina, says Marcelo Etchebarne a partner at Argentine lawfirm Cabanellas, Etchebarne, Kelly & Dell’Oro Maini. He adds that a suit against the government could potentially result in much higher recovery, but that the proceedings will take 5-8 years, provided there is not another crisis.
Bringing a Deal
In the past, the sovereign has ignored pressure from the international community, and bondholders lack a unified negotiating platform. “The holdouts are an incredibly diverse group of investors or original owners and people would be all over the map,” concedes Raben, whose group does not collectively negotiate for the creditors it represents.
“If I were them, I would try to come up with an approach to the republic in which I present a deal on the table,” says Etchebarne, counsel in the Provinces of Buenos Aires’ $3 billion exchange, which investors saw as much more market friendly than the sovereign workout. He advises holdouts to appoint an advisor to take a deal to the government.
“The haircut would be lower, even if you took worse terms, than the haircut bondholders took in 2005 because the bonds are trading better,” says Etchebarne. “From a cosmetic point of view, the republic is not going to take a deal on better terms because that would go against the majority of the bondholders who accepted the deal that was on the table.”
The sovereign divided and conquered in the 2005 workout and the new administration will see little domestic political gain from resolving outstanding holdout issues. Overall, it looks like Argentina is free to coast on elevated soft commodity prices and handouts from Venezuela, at least for the short term.
Other Shoe Dropping
However, this short term crutch may soon disappear. The Chávez influence is starting to wane in LatAm, according to participants on the panel. Rafael de la Fuente, chief LatAm economist at BNP Paribas, highlights Venezuela’s inability to keep the state oil company at arm’s length, along with an over reliance on crude as major problems. He adds a fixed exchange rate, food shortages and inflation to the list of woes and says oil could remain at current levels and the sovereign could still have a crisis.
“This is going to end in tears,” says de la Fuente. “The writing is on the wall. When that goes, so does the influence that he yields. My perception is that influence is not long lasting.” He adds that Argentina is not ideologically committed to Venezuela. “Things can turn on a dime and I’m not a big believer in Chávez wielding dominance in the region.”
Others say the Venezuelan people and other LatAm nations will see through Chávez as they align themselves increasingly with democracy. “I’m a believer in the sanity of humanity and I think that ultimately people will see that Chávez is not the way of the future,” says Nancy Soderberg, co-chair of AFTA. “They’ve got $46 billion in reserves and their continued reliance on Chávez is a tarnish on the proud history of the Argentine people, who really should be part of the European community, the American community – the first world of finance.”
Soderberg, a former ambassador at the US mission to the UN, adds that Chávez is an annoyance but will lose support once the dominance in the region – and the world – of anti-Americanism fades. Panelists were unable to predict how long the Venezuelan president will last, though they agreed that he may exit in crisis even if crude prices hold firm.
“It could turn very quickly,” says de la Fuente. “Whenever the time comes that oil is sustainably around $60 a barrel, add 12-15 months to that,” says Standard Chartered’s Smith, who also notes a pick up in short term trade finance between Venezuela and China.
Sanity Will Prevail?
Optimists believe that Argentina will eventually see sense and settle its debt problems. However, this seems Panglossian, especially given Argentina’s track record. And no one is willing to pin down a schedule for resolution.
Etchebarne notes that the statute of limitation on the sovereign debt is four years for interest and 10 years on principal. “You have past due interest, which if you are not under a litigation proceeding against the republic will have expired, and principal will expire in 2012. That gives you a timeframe.”
The lawyer adds that the sovereign would likely push for a comprehensive fix. “Argentina will only come up with a solution that solves the entire problem and not a portion of it,” says Etchebarne.
AFTA remains confident, despite a lack of encouragement from the new Argentine administration. “I think we are going to see some movement,” adds Raben. “I can’t speak for how quickly they are ready to go. We are not going to let up.” The ball remains firmly in the Argentines’ court. LF