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Analysis
Realpolitik in Buenos Aires

Realpolitik in Buenos Aires

Default negotiations complicated by vice-presidential corruption charges

by David Smith in Buenos Aires

Tue 1 Jul 2014

Argentina has assumed once again the narrative that has to be the communicator's worst nightmare, and Wall Street's perennial fear. The country is once again in technical default on its large debts, for the second time in 15 years.

In reality, Argentina has another month to find a way to cut a deal with its 'hold-out' creditors, courtesy of the New York judge hearing its case against the hedge funds which own almost 8% of the debt outstanding from the country’s financial collapse in 2001.

Argentina’s ability to take a moral line on the issue meanwhile has been severely impaired by another judicial setback – this time, from within the country – under which vice president Amado Boudou has been formally charged with corruption. Boudou, a key ally of President Cristina Fernández de Kirchner, is implicated in an investigation into Ciccone, a printing company rescued from bankruptcy and awarded a government contract to produce pesos. The vice president, along with five other defendants, is accused of using intermediaries to gain a 70% per cent stake in return for favours.

As far as the economics of the matter are concerned, for once, the equation is reasonably clear. The hold-out funds are seeking full compensation, amounting to $1.13bn with interest. Argentina is paying other creditors roughly 35 cents on the dollar, comprising those which accepted the debt restructurings of 2005 and 2010.

And there's the rub. If Buenos Aires pays the hold-outs funds full value, as the court orders, why would others accept little more than a third of what they are owed?

Argentina would like to believe it is benefiting from a Greek chorus of support. The sympathisers from all corners: the International Monetary Fund, France, some important, enlightened sections of Washington, Britain, even the Financial Times. Buenos Aires has taken out adverts in international newspapers protesting that having bonds issued under US jurisdiction ‘does not mean accepting court decisions that are impossible to comply with. All the more so if any such decision violates the sovereign immunity principle effective in the US.’ It has sought to deflect the blame by attacking hedge funds – which the president refers to as ‘vultures’ – as agents bent on ‘extortion’.

A central role is played by an Argentine deposit of $539m at the Bank of New York Mellon last week, earmarked to pay outstanding creditors. Judge Thomas Griesa on Friday ordered: 'Send it back to Argentina' on the grounds that Argentina's attempt to pay holders of its restructured debt was illegal until the country paid off the ‘hold-out’ creditors too.

Financial sources in Buenos Aires believe that figure represents how far the government is prepared to go, in an opening proposal to the hold-outs that equates to a 'take it or leave it' offer.

The government is gambling that its biggest weakness, the vulnerability and stigma that go with national default, equals its greatest strength in the quiet negotiations, with a mediator appointed by the judge, that are now under way. Realpolitik in Buenos Aires is that Argentina's default serves no one's purpose, least of all the 'hold-out' funds.

So the message is: ‘We default, and you lose. Find a middle ground, and a number that can be sold to all parties, and we all win.’ That is the difficult space in which all parties must try to find a compromise. Reaching it will not be made easier by an atmosphere of heightened political febrility in the wake of the vice-presidential corruption charges.

David Smith, member of the Advisory Board, is a writer, professor and adviser to NGOs based in Latin America.

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