By Bianca Fernet, The Bubble:
In a piece published by the New York Times this morning, American University’s Arturo Porzecanski was quoted as describing the brewing situation in Argentina as “kind of a chronicle of a default foretold,” referring to Gabriel García Marquez’s tragic tale “Chronicle of a Death Foretold.”
While Argentina’s current kerfuffle is self-imposed and thus not so tragic, it may be about to share a very classic element with Greek tragedy – salvation from above à la deus ex machina.
This “god from machine” refers to the technique whereby lazy poets and writers would weave their characters into extreme situations by creating plots that could not be resolved by way of feasible means, and then resort to using scaffolding (machines) to allow the gods to come down and sort things out via divine intervention.
Yesterday evening it was announced that the Asociación de Bancos Argentinos (ADEBA) is willing to engineer what is being called (ahem by us) a Reverse Bailout™ by stepping in and buying the holdouts’ non-restructured bonds.
According to Infobae, head of ADEBA Jorge Brito delivered the proposal he likely spearheaded to provide a guarantee of US $250 million to facilitate compliance with Griesa’s ruling.
Facilitate compliance. That’s a confusing statement worthy of lawyers everywhere! As a world-celebrated faux lawyer myself, let’s take a look at what this means.
Argentina must either pay the “vulture funds” around US $1.2 billion or no banks are allowed to process their payments to holders of restructured debt. If holders of restructured debt do not receive their payments by midnight tonight, Argentina will be declared in technical default.
Defaults are catastrophic when they are unexpected because they lead to crises. In the case of this technical “default foretold,” even Christine Lagarde of the IMF has noted that markets wouldn’t be too mussed over a default; instead, the legal precedent currently being set will have lasting implications in future sovereign debt issuances and cases.
So while the technical default wouldn’t cause a crisis or really put much of a hitch in anyone’s giddy up in the immediate aftermath, it would still slow Argentina’s efforts to embark upon what I consider a conservative but laudable path towards the normalization of relations with the outside world that could in turn give the country the tools to address the problems that actually fetter the economy:
- Subsidies – especially of imported energy and imported energy intensive goods
- Parallel Unofficial Exchange Rate – the root of so many things bad in Argentina
- Barriers to Trade – export tariffs, quotas, and import restrictions in particular
Argentina’s path towards normalization is paved with happy events such as the settlement with Repsol and the Paris Club, but a default, even if it is only technical, would constitute more than a pothole.
The conundrum faced by Argentina is that if it pays the holdouts anything more than it has paid the holders of restructured debt before 1 January 2015, it will trigger the dreaded RUFO clause and owe holders of restructured debt the same paid to holdouts – a number Bloomberg puts around the US $30 billion mark. As deus has a sense of humor (which probably comes in handy when you’re constantly being dropped into difficult plot lines ex machina), Argentina also has about US $30 billion in reserves.
To avoid technical default AND bankruptcy, Argentina needs to find a way to convince the “vultures” to ask Griesa for a stay. And while the Argentine government can’t give the holdouts money without triggering RUFO, that doesn’t prevent a convenient consortium of Argentine banks from stepping in and “facilitating compliance” by doing just that!
And indeed, this morning Infobae reported that Banco Piano, who along with Puente makes up the top tier of private banking in the country, confirmed that ADEBA will form a fund to reinstall the stay. ADEBA even sent its own emissary to New York to participate in the negotiations.
So it looks like an association of “private” bankers will pay enough of the outstanding US $1.2 billion to convince the “vultures” to ask Griesa to reinstall the stay, allowing negotiations to continue until at least 1 January 2015 when RUFO expires.
Where does the US $250 million that ADEBA is putting up come from? Your guess is probably not quite as good as mine, but its close. Maybe the government is channeling money through ADEBA, maybe the government is giving the participating banks some special exception to trade or currency barriers in exchange for putting up the funds, or maybe ADEBA really does have a strong motive to ward off any default, even one foretold and technical.
This also brings up an idea highlighted in an interesting article that made its rounds on (ugh) Twitter: why are exchange bonds trading higher on news that Argentina might default? In a theory called the #Griefault trade, the author explains why Argentina’s bonds might be worth more in default. He discards the notion that the bonds are being bid up because investors believe the government will find a way to settle with the holdouts, and speculates instead that buyers believe Argentina will default and pay even more on the restructured notes in the form of interest when the matter is resolved in the future. Maybe the bonds really are trading up because people believe Argentina will find a solution and we will see a #ReverseBailout rather than a #GrieFault.
Regardless, if the situation does unwind this way and there is no default, just another
shady agreement reached behind closed doors legal “compliance facilitated” in a completely transparent setting, I think those of us who have been counting down to default will be nothing short of disappointed and forced to wait until December 2014 when looming default will again be used to settle a sovereign debt dispute. By Bianca Fernet, The Bubble.
Life is rarely win-win. Unless you run a big hedge fund. Read…. Argentina Default: Is Paul Singer Playing Both Sides?