Argentina: Defiance of U.S. Court ruling and resignation of Central Bank chief put pressure on currency
October 15, 2014
Argentina is at risk of entering into a second default at the end of October, which has put renewed pressure on the local currency. A default would represent a step backward for the country as it attempts to restore credibility among international investors and also has the potential to weigh on the country’s economic outlook.
Argentina entered into technical default on 30 July, when the 30-day grace period for coupon payment on a set of bonds expired and the country was unable to pay its bondholders. At that time, the government had not yet struck a deal with the creditors who rejected participation in the 2005 and 2010 debt swap—the so-called holdouts. Payment to the country’s regular creditors was blocked by U.S. District Judge Thomas Griesa, who ruled earlier this year that Argentina could not repay holders of restructured bonds before repaying the holdouts in full.
In an attempt to circumvent the ruling, the Argentinean Congress passed a law on 11 September allowing holders of restructured bonds to swap them for new ones in either Argentinian or French jurisdictions. The law replaced the former trustee, the Bank of New York Mellon, with the newly-appointed local trustee Banco Nación Fideicomisos. Following on that law, the government deposited USD 161 million into Banco Nación Fideicomisos on 30 September in order to make a coupon payment on a set of bonds expiring on that date. However, Judge Griesa responded publicly and stated that Argentina was taking illegal steps to meet its debt obligations. After the 30 September coupon payment deadline, a 30-day-grace period began. If the funds deposited locally are not transferred to bondholders abroad by end of October, Argentina will enter into a second technical default. According to analysts, the transfer is not likely to take place as the financial intermediaries in charge of executing the transfer do not want to disobey Judge Griesa’s ruling.
Meanwhile, Argentina Central Bank Governor Juan Carlos Fábrega presented his resignation on 1 October after less than a year in office. His resignation came at a time when he demonstrated disagreement with the executive’s approach to dealing with the country’s inflation problems. His successor, Alejandro Vanoli, was head of Argentina’s National Securities Commission and is considered by analysts to be a loyalist to the Fernández administration.
The possibility of a second technical default and the sudden resignation of the Central Bank governor have raised uncertainty and put further pressures on the local currency. On 30 September, the black-market peso—the so-called “blue dollar”—traded at 15.70 ARS per USD, which marked the lowest value of the parallel peso against the USD on record. The blue dollar improved only slightly in the following days, trading at 14.81 ARS per USD on 10 October, which was 3.6% down from its value on the same day of the previous month. On an annual basis, the blue dollar has lost more than half of its value, having weakened 51.5%.
Inability to solve the row with the holdouts means the country is still being shunned by international markets and thus must rely on its dwindling international reserves to pay for imports and to honor its debt obligations—a situation which is weighing heavily on the country’s economic outlook for both this year and next.
Author: Cecilia Simkievich, Economist