IT’S “NOT” THE DEFAULT, STUPID

Across the world, viewers and readers alike learned the news that Argentina again has gone into default (1) for the second time in 13 years.
By now, everyone should know that Argentina is a unique nation: (i) it’s the only country that lost its ranking among the top 10 richest countries in the world for no other reason than “chronic mismanagement”; (ii) its large middle class and mostly educated population failed to build strong and credible institutions; (iii) and its rich and diverse natural resources rather than becoming a catalyst for long-term economic growth—were in turn hijacked and misused by each passing new administration.
A new default would have triggered a major sell-off in most markets, but not in Argentina—valuations today are about the same they were just two months ago.
The foremost consequence of any sovereign default is the incapacity for the country’s public and private sectors to access foreign capital. In most developed economies this would be catastrophic—as the U.S. and European financial sector briefly experienced during the 2008 crisis. However, Argentina has been in de facto default for the past 12 years as high spreads have inhibited it from accessing international debt markets. Still, its GDP grew and its unemployment fell from 20% to 7% between 2003-2013.

The Argentine economy experienced high growth rates between 2003-2011 due to a combination of high commodity prices and a renewed demand for Argentine products. This made up for at least part of the risk entangled on its sovereign debt, capital inflows were ephemeral as well as marginal when compared to its regional peers. In essence, Argentina lost the golden era of low-cost debt.
As soon as the economic cycle waned, the government resumed and increased its direct intervention in the economy, with shortsighted and ill-conceived policies that halted investment and further complicated the access to capital. The high volatility of the sovereign spreads and its timely reaction to news are consistent with the story where the latest lawsuit with the Holdouts has become just a small part of a much bigger conundrum -dwindling foreign reserves, public deficit, stringent capital controls, nationalizations, high inflation, devaluation and no access to international debt have created the perfect storm.
Without doubt, the latest default was a significant step backwards and opened the door to a much more dangerous risk—a cross default—but most importantly it represented a missed opportunity to get Argentina back on a path to capital markets after more than a decade of costly absence.
Two things must be clear; the first is that although the government may eventually settle the lawsuit with the Holdouts (most likely sometime between 2015-2016) it will do nothing to fix the grave deficiencies it created in the economy. Secondly, while these challenges are serious, so are the opportunities at hand. It is almost guaranteed that the task of ending the long and painful default will have to fall to the new administration—and while no one is expecting the new government to solve the whole Argentine riddle, a change of pace and a new direction are imminent.

(1) There has been a lot of debate in Argentina on whether these recent events actually constitute a default. This debate only has an implication for the cross-default clause and for history books. To the extent that this article refers to the normalization of the relationship of Argentina with the financial markets, this event has the same effects to a default and we shall leave the discussion on semantics to someone else.