Foreign debt default is unavoidable, Argentine officials say

Foreign debt default is unavoidable, Argentine officials say
Argentine President Cristina Fernandez de Kirchner arrives at the Flag Monument in Rosario to celebrate Flag Day on June 20. (Argentine Presidential Office)

Although Argentina's apparently imminent default on its foreign debt is unlikely to trigger a rerun of the economic and political crises that nearly tore the country apart a decade ago, it could usher in a new era of hardship, analysts said Friday.

President Cristina Fernandez de Kirchner said this week that she wouldn't make a $2.23-billion payment due June 30 to foreign bondholders. The economy ministry followed up with a statement saying that avoiding a foreign debt default, which would be the country's second since 2001, was "impossible."

Of the amount due, $900 million is owed to creditors who accepted deep discounts in their bonds' face value during restructuring in 2005 and 2010. The additional $1.33 billion is owed to "vulture" bondholders who refused the discounts and whose claim for full payment was upheld Monday by the U.S. Supreme Court.

News of a likely default recalled the turmoil of late 2001 and early 2002, when Argentina was forced to devalue its currency and freeze bank accounts, leading to years of high inflation and recession. Over a one-month period ending in December 2001, a succession of five presidents occupied the Casa Rosada presidential palace.


Such an unraveling is unlikely to occur this time for many reasons, economist and author Martin Kanenguiser said. The national currency, the peso, is no longer pegged to the dollar on a one-to-one basis. And the banking system, which no longer permits dollar deposits, is strong and liquid. Moreover, the central bank has ample reserves — for now.

"There is no possible scenario in which bank accounts will be confiscated as happened in 2001.... Back then global conditions were against us, with high interest rates and low commodity prices. Now it's the opposite," Kanenguiser said, referring to Argentina's high volume of farm exports such as soy and wheat.

A bond default could trigger another major currency devaluation, higher inflation and economic stagnation, Kanenguiser said. But even if that happens, the massive civil unrest seen in 2001 and 2002 that left dozens dead and billions of dollars in damages is unlikely.

The official inflation rate has been pegged at 16% to 20%, though independent economists say it's running as high as 35% this year.

Fernandez's populist policies — which include cash transfer payments to the poor and subsidized electricity and food — have scored points with Argentina's lower-income voters.

"All in all, the government is facing difficulties but not the social explosion that was practically inevitable" a decade ago, Kanenguiser said.

Another analyst minimized the repercussions of a fresh default, saying the conditions are different now than at the end of 2001 and into 2002.

"A bubble burst in 2002. There is no bubble any more. Nothing to burst," said the analyst, who requested anonymity because he was not authorized to discuss the issue publicly. "And the amount of debt to be defaulted on is relatively minuscule. In 2002, it was $100 billion — the biggest default in history. Now it's almost nothing."

Attorneys representing the Argentine government have said they will meet next week with "vulture" hedge fund managers in New York in an attempt to hammer out a settlement, which would be the first such meeting of the two sides after a decade of wrangling.

But CNBC reported late Thursday that though managers at one of the New York-based funds, Elliott Management, are open to the talks, executives have not been contacted by the Fernandez government.

Another hedge fund owning Argentine bonds that have not been discounted is Aurelius Capital Management. Reuters quoted Aurelius President Mark Brodsky on Thursday saying that he expected a "charade" in any such meeting but that he "hoped to be proven wrong."

"I have learned not to rely on any assurance Argentina's counsel provides to our courts," Brodsky said.

Special correspondents D'Alessandro and Kraul reported respectively from Buenos Aires and Bogota, Colombia.