As the July 30 deadline approaches, the Argentinean government must broker a deal with foreign bondholders to pay more than $1.3 billion claimed by hedge funds, including NML Capital and Aurelius Management in order to avoid defaulting on its debt. If Argentina fails to reach an agreement with these firms, it will experience its eighth default, negatively affecting Argentina’s economy. As it currently stands, Argentinean delegates seem to prefer playing hard to get; Argentina’s financial delegates are currently refusing to meet with these foreign bondholders. With the world’s second highest inflation rate, Argentina cannot afford to risk yet another default.
This kind of financial misconduct is not new to Argentina. In 1999, Argentina spiraled downward into the largest recession of its history. Consequently, people living in Argentina became very skeptical of their government’s fiscal policies, leading to mass withdrawals from Argentinean banks. Much of that money was subsequently exchanged for the more stable U.S. dollar. As a result, the government imposed its infamous Corralito, a financial policy that prevented all banks in Argentina from facilitating withdrawals and limited people’s ability to exchange Argentinean pesos for U.S. dollars. Thereafter, in 2002, Argentina defaulted on $82 billion in sovereign debt, leading to the worst financial disaster of the country’s history. In 2005, Argentina began the process of paying back its debts, but the crisis had undeniably lasting effects on Argentineans’ paychecks, especially those of a lower socio-economic position.
During the 2001 crisis, mass riots spread throughout Argentina. The country faced high inflation rates, debts roughly equivalent to the country’s GDP, and an unemployment rate over 20 percent. People took to the streets, sacked banks, and burned government buildings. Hundreds of protestors died in the riots, but hundreds of thousands were still left stranded in an economic hole. More than 53 percent of Argentineans fell below the poverty line post-default. With no banks willing to finance loans for people who were not wealthy, Argentina’s homeless rate skyrocketed to an all-time high. As Argentinean banks progressively opened up to negotiate individual loans, deposits, and withdrawals with the people, the Argentinean economy slowly became more stable. However, now, political analysts warn that if Argentina continues to ignore its financial responsibilities, this past is one that is likely to be repeated.
Unsurprisingly, it seems as though Argentina’s government has not learned its lesson. Once again, the government has made it difficult to withdraw currency from Argentinean banks and has made it illegal to exchange pesos for dollars unless it is done through a bank approved by the government. As a result, there are now two exchange rates in Argentina: the official government exchange rate, which currently stands at 8.19 pesos per 1 U.S. dollar, and the underground mercado paralelo (parallel market) exchange rate, currently at 11.85 pesos per 1 U.S. dollar.
The Argentinean government is sending mixed messages about its approach to the dealings. On Tuesday, U.S. District Judge Thomas Griesa ordered that Argentinean officials meet with these firms. Argentine Cabinet Chief Jorge Capitanich was quoted saying “With the good faith of the vulture funds and a rational attitude from Griesa, this litigation can be resolved.” However, NML Capital Ltd says that Argentina’s government has clearly shown “that it will be choosing default next week.” Realistically, a deal can be ironed out, but it would be physically impossible for Argentina to pay all of its debts back, according to Argentina’s legal team, because that would entail cutting entire government programs, such as police forces and funding for public schools.
The Argentinean president’s view on the crisis is hardly reconciliatory. Since 2001, NML has refused to negotiate lowering Argentina’s debt. As a result, President Cristina Fernández de Kirchner has resorted to labeling NML as “vultures” that pick on the carcass of Argentina’s 2002 default.
It seems as though Argentina has yet to learn from its past errors. A fundamental lack of government transparency, bank freezes, and irresponsible spending has stripped the Argentinean government’s credibility, financially alienated those who need the most assistance, and put a stop to Argentina’s economic growth. Most frightening of all, an Argentinean default could pose negative ramifications on the worldwide bond market, making bonds issued to countries relatively more expensive, reducing their yield. As a result, it is of utmost importance that Argentinean officials make a deal with their bondholders in order to maintain a stable global bond market.
