Wednesday, October 31, 2012
Argentina Moving Closer To Crisis Every Day
Have you ever wrecked your vehicle only to find out that your insurance company is raising your rates as a result? The bond and currency rating agencies work in similar fashion. Today, both Fitch and S&P took Argentina out to the woodshed by lowering it's credit rating (bonds and currency).
Lower credit ratings mean that Argentina will find it even more difficult to find buyers for their bonds. Without issuing bonds (debt) Argentina wouldn't have sufficient resources to operate it's government. When they do find an entity willing to take on the risk there will be a premium paid because the perceived chance of default is very high.
Apparently, US Appeals Court Judge Griesar ruled that Argentina breached the 'Equal Treatment Provision' of the original New York based law bonds that Argentina defaulted on during the crisis of 2001. The bottom line is that Argentina was ordered to make payments to those entities that have held out and not negotiated with the country. Previously, the Argentine government was only making payments to those who agreed to take what they could get while the 'holdouts' were getting paid nothing. Although, she did take the time to criticize the judges decision; the reality is that the president of Argentina, Cristina Fernandez de Kirchner, will likely not comply.
To add to it's woes, Argentina has been ducking creditors since 2001. One of which is a well know hedge fund from the U.S.. The fund purchased defaulted debt bonds at a discount and has been repossessing Argentine assets ever since. A total of 29 different assets have been seized by the fund. Even though all assets have been released they will likely continue their quest until the debt is paid. The most recent 'asset' was the Argentine Navy's flag ship the ARA Libertad. It is still sequestered.
The ship was impounded while docked in the West African nation of Ghana. A local court ruled that the ship could be held on behalf of NML Capital. This is a HUGE embarrassment for the Argentine government. Since 2004 the government has had to fight to keep from losing other assets. Aside from the ARA Libertad, NML attempted to seize properties in the US including the Argentine Ambassadors’ residence and armed forces attaché offices, and the President’s private jet!! Eventually, the assets were released but imagine the embarrassment and resources expended dealing with these circumstances.
In a country who's president's favor-ability ratings have fallen to around 25% there is little sympathy amongst Argentines. Most of them would love to see her go.... that is, all except the nonproductive populists who would elect her if she underwent a frontal lobotomy.
I suppose, if there is a lesson to be learned here it's that just because you are a sovereign nation and not an individual person that does not expunge you from your obligation to pay your debts. So, when you don't pay your debts lenders come and take your shit just like it would anyone else.
On a personal note, most of the Argentines that I know think the repossession situation is quite humorous. Most will tell you that they are happy that their idiot president is being faced with these embarrassing situations. There are the few holdouts who believe and defend the government propaganda but I avoid having meaningful conversations with these sheep minded folks.
In another seemingly ludicrous move the government has virtually shut down the real estate market. Traditionally, real estate transactions and other large purchases were made in dollar and not pesos. The Kirchner government issued a decree that no loans would be issued in anything but pesos. I admire her patriotisism but it ignores the reality that no one will buy real estate in pesos.
As a consequence of this decree real estate operation during plunged 22.4% during September from a year ago. Since January it dropped 12.6%. In Buenos Aires real estate operations are said to have free fallen 60%!
Keep it up Cristina! This country needs a good old fashioned crisis to recalibrate!