First, investors seemed to believe that the US Supreme Court would come to the rescue as a final appeal. More recently, investors believed a deal with the holdouts – bondholders who did not sign up to debt restructuring – was not just possible at the last minute, but probable, after a near-decade of wrangling. This week, investors believed that a potential consortium of Argentine banks was going to swoop in, with 24 hours left until the close of a 30-day grace period for payment, to buy holdout claims with no prior negotiation being evident. Now the default has been finalised, further hearings and meetings are a near certainty.
Why has this optimism been so misplaced? Because looming beyond the less than $2bn (£1.2bn) in holdout claims are potential claims by other bondholders that could total $10-$12bn. That sum has always seemed the sticking point, because if Argentina agreed to those claims, even if paid in bonds, it would greatly increase the odds that its government would find itself in a similar situation a few years down the road.
And Argentina’s fundamentals are deteriorating. Its current account deficit – the broadest measure of external accounts – turned negative in 2009 and has been getting more deeply negative ever since. The main reason is the country’s turn from a net exporter of energy to a net importer due to policy mismanagement over multiple political regimes. That trend will likely take years to reverse, if at all.
The government’s fiscal accounts follow an eerily similar pattern, and the fiscal deficit currently stands at more than 4 per cent of GDP. International reserves peaked at around $52bn in 2011 and are now only $29bn, having bounced from a low of $27bn earlier this year, primarily due to a seasonal recovery in soybean export receipts – entirely consistent with the trends noted earlier.
Since the start of 2013, the currency has fallen in value by nearly 64 per cent as a means of coping with the negative trends. That has, of course, led to high inflation, which is running at around 25 per cent, though it is probably impossible to accurately gauge due to government obfuscation.
So beyond the media’s focus on the courtroom drama lies a country with significantly deteriorating fundamentals despite a debt burden that, on the face of it, looks small enough to accommodate a settlement with holdouts for the foreseeable future.
Once the dust settles on the current market obsession with bond prices that are rising and falling by multiple points with every rumour of an imminent deal, Argentina will still be a country that must open up its energy sector, consolidate fiscal accounts, and probably slow growth with higher interest rates. There is no indication of political willingness to do so. Given that, the probability that the Argentine drama returns in three to five years or so, regardless of the outcome of the current dispute, is very high.