A popular yet utterly nonsensical argument these days against the possibility of an Argentine debt default, devaluation, or both goes a bit like this: It would be extremely painful.
Please. This is a bit like saying a rational person, given a choice, would prefer not to get hit by a bus.
PHOTO: AP
The problem is that right now Argentina may not have a choice. If countries always had a choice between defaulting or devaluing and not defaulting or devaluing, this argument would make sense.
But countries usually don't have much choice when things deteriorate as much as they have in Argentina. By failing to cut spending for the better part of the last decade, Argentina has handed the bus keys to the markets and asked to be run over.
Investors have decided that Argentina has too little growth and too little revenue to service its US$130 billion in government debt, not including provinces, and not much chance of quickly reviving its economy. So they are starting to dump Argentine bonds. Thursday, the price of Argentina's floating rate bond maturing in 2005 dropped 13.4 percent to 63.12 from 72.88 as the yield rose to 36.1 percent.
Damage like that is going to be hard to repair. The bond rose to 64 after gaining as much as 6.3 percent in early trade.
Thursday night, the Argentine government said it had started to cobble together support among the ruling political coalition for drastic spending cuts. Now the government hopes to bring the opposition politicians on board as well. Still, you have to wonder how strong any commitment to cutting spending might be. Argentina has failed to cut spending time and again. Now it is on the verge of dragging markets worldwide, especially those of developing nations, down the drain.
Global impact remains unclear
To be sure, it is not yet clear what long-term impact the Argentine fire sale will have elsewhere. There is far less leverage in the global bond markets now than there was when Russia defaulted in 1998. But economies worldwide are weaker now than they were three years ago and that isn't going to help matters.
A comment Thursday by a deputy from Argentina's Peronist Party also shows just how far removed from reality some of Argentina's political elite may be even at this late stage in the game.
"I can't believe the economy minister and the government are only now telling us that without these measures we have no credit and will default," said Alfredo Atanasof.
Wall Street analysts have not completely lost their minds, despite compelling evidence that suggests they have. Just six weeks ago, many of them were eagerly hawking a ridiculously expensive US$30 billion Argentine bond swap. The banks that organized the swap charged about US$140 million for their efforts.
Now there is a flood of solemn and carefully hedged reports saying that Argentina might default on these new bonds. We may be witnessing a record for the quickest blow-up of brand-new Latin American sovereign bonds.
Credit rating downgrades suggest a record may be near.
On Friday, Moody's Investors Service downgraded Argentina's long-term foreign currency debt rating by one notch to "B3" from "B2," or six notches below the lowest investment grade.
Thursday, Standard & Poor's announced its fourth downgrade of Argentina's foreign currency long-term credit rating since November. S&P pushed the rating down one notch to "B-" from "B," six notches below the lowest investment-grade rating.
That said, let's not underestimate the ability of Argentine Economy Minister Domingo Cavallo to ride the edge of this razor a bit longer.
There is a reason that Argentines have a reputation on Wall Street for being among the best traders around: They are extremely resourceful in stressful moments when others might just fall apart.
`Nose-bleed rates'
Since taking office in March, Cavallo has demonstrated an impressive ability to stave off what appears to be imminent calamity.
He has put his considerable talents to use again over the last few days with his latest plan to cut spending. Cavallo may be postponing the inevitable. His plan for the government to spend only as much cash as it receives each month could, if it works, eliminate a lot of new borrowing.
However Argentina must still rollover or pay down US$8.8 billion of debt this year. The cost of rolling over this debt will remain high because many investors now see a default looming. No country can survive long by borrowing at nose-bleeding rates.
What's more, investors in Argentine debt are not just foreigners.
More than a third of the country's public debt as of December was held by Argentina-based investors who may also be selling their holdings this week.
Perhaps the real measure of how much time Argentina has left is the reaction of average Argentine citizens to the current turmoil. The country might be able to muddle through a while longer with the Draconian spending cuts, but if Argentines start yanking billions of dollars out of local banks, it won't.
We won't know that for sure until this week, since total private bank deposits are reported with a lag. They dropped by more than US$3.1 billion in March to about US$72 billion. By last Tuesday, before the dive of Argentina's bond prices accelerated, private bank deposits had recovered just US$573 million from the end of March to US$72.5 billion.
The Argentine endgame has begun.
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