Can Kirchner Maintain his Hard Line on the Debt?
Ever since last September’s Dubai summit, when Argentina proposed a 75% cut in its $90 billion private-sector debt, already in default, the country's government has maintained an immovable stance. President Néstor Kirchner himself has taken the lead in the negotiations, while economics minister Roberto Lavagna has remained in the background. So long as the president refuses to soften his hard line, analysts fear that the country will lose credibility. Investments will be postponed, and the IMF will not approve the goals of its current agreement with Argentina, whose revision must be approved by March 9. Already, the negative effects can been felt as impatient bond holders have begun to seize and freeze Argentine assets outside the country.
Stubborn, unsettled and capricious, Kirchner is also austere and well-intentioned. At least, that's how Kirchner is usually described in Argentina. His unique way of facing up to the direction his country moved in last year has given people a lot to talk about. Most of all, they are talking about his informal, direct way of dealing with such difficult topics as his country's social crisis and its debt.
On the very same day when he became president, Kirchner managed to play with the role of president, getting away from his bodyguards to offer effusive greetings to the public. After walking around with his jacket unbuttoned, he was sworn in while wearing an improvised bandage on his forehead, which covered up a wound that came in a tussle with a photojournalist’s camera. For all that, what worries Argentine and foreign analysts most about Kirchner is his stubborn way of treating the issue of Argentina’s debt in a personal way.
Unlike other governments, where the economics minister is the official responsible for these types of negotiations, Kirchner has appeared in person, seeking help and engaging in direct dialogue with creditor nations. Although he irritates people, he has taken an extremely tough position that has been unacceptable to creditors. He wants creditors to forgive 75% of Argentina's debt, a stance built into the reconstruction plan that Argentina presented at last September's summit in Dubai.
So far, Kirchner has not softened his initial position. The problem is, in the nearly five months since that announcement, creditors from around the world -- including Italians, Japanese, Germans, and Argentines -- have all been impatiently awaiting a more coherent response to their expectations about recovering part of the money they loaned Argentina during the 1990s.
The $90 billion debt involves more than 150 different types of bonds, held both by institutions such as AFJP (which runs Argentina's retirement and pension funds) and private individuals, including many Italian, Japanese and American retirees.
An Original Negotiating Style
Whether Kirchner's approach to negotiations is good or bad, at least it is original. No other country in default has ever taken this sort of approach. "Argentina has unveiled an original style of negotiation that has not been tried out anywhere in the world. Although countries such as Russia, Peru and Ecuador have gone into default, not one of them has come with the same terms as Argentina. Nor have these other countries racked up debt with such a variety of bonds and with so many different creditors," says Argentinean economic journalist Daniel Muchnik.
José Ignacio García Hamilton, a lawyer who specializes in debt restructuring, agrees. "The proposal for Argentine relief is the biggest that anyone has drawn up until now. For example, neither Peru nor Ecuador proposed a similar cut. The highest figure that I remember was in the case of Russia, which applied for relief of 65%."
It's quite unique that the president himself has come out and managed things, assigning economics minister Roberto Lavagna to a much lower profile. "I believe managing the debt negotiations must be in the hands of the economics ministry, which is technically trained to do that. On the other hand, the proposal for cutting 75% of the debt seems like a complete mess to me, because that figure would be realized on the nominal value [of the debt]. That means giving arbitrarily unequal treatment to different types of bonds, without any apparent reason, says Victor Beker, director of the Center of Studies of the New Economy, at the University of Belgrano.
On the other hand, Carlos Malamud, chief researcher at the Elcano institute in Spain, believes that "negotiations with the IMF and with creditors have been tense, and they are very much tied to the Kirchner style: Tough at the outset, and then giving up in areas where it's possible, yet having the main goal of holding onto power."
Many believe that Kirchner's strategy is too tough and unfair. This happens especially whenever the president chooses an untimely moment to accuse bondholders of being "vultures" and "gamblers."
Franco Pellegrini is an Argentine who inherited bonds from his father that are now in default. “I admit that it is not possible from a technical point of view [for Argentina] to comply with every creditor at this time,” he says. “What bothers me is that they refer to ordinary savers like me as 'gamblers,' or they use that term to refer to my father, who had no choice but to receive those bonds."
The bondholders have begun their own lawsuits. Beginning on January 31, they seem to be in good shape to collect on favorable judgments, thanks to a decision by Thomas Griesa, a New York judge.
In one such case, NML Capital sued the Argentine government for $172 million. In 15 cases, NML and other funds have effectively frozen government-owned property as well as deposits from the Argentina's military and diplomatic corps in the U.S. This includes an account of the Argentine ambassador in Washington.
Loyal to his style, Kirchner has argued that freezing Argentine assets in the United States amounts to mere "fireworks." He described as "naive" those people who criticized his decision not to improve his offer to foreign creditors. "If they want to squeeze, let them squeeze," he said at a recent government function that included officials and labor leaders.
Aerolineas Argentinas was one source of support for the Argentine government. Formerly state-owned, the airline's current owner is the Marsans group. Faced with the possibility that creditors might seize the presidential plane, "Tango 1," on foreign soil, Marsans' company offered Kirchner a Boeing 747-200 especially equipped for foreign travel.
Another byproduct of this situation is the drop in share prices of those foreign companies that have invested in Argentina. According to Raquel Lander, of Expansion, the Spanish business newspaper, Argentina's scant interest in speeding up the restructuring process "has generated a great deal of volatility in shares of Spanish firms that have a presence in Argentina. This includes BBVA [bank], which fell by 2% on February 12, and Repsol YPF, which fell by 2.4%."
Keeping pace with news about Argentina's debt, the country's stock market is also suffering. On February 10, the market plunged by 7.9% when the Argentine government announced a delay in meeting with its creditors. More recently, the exchange managed to regain some ground when Argentina announced the three banks that will advise the country during the restructuring process. That was the first and only positive signal that the Kirchner administration has made until now.
Argentina is also endangering the arrival of new funding, which is indispensable for the functioning of its economy. In one case, the World Bank has suspended approval of a $5 billion credit line unless the government reaches an accord with the IMF by March 9, when the second revision of the agreement with that organization expires.
Investment is another area of concern for analysts. "Long-term, Argentina is running the risk that it will turn off foreign investors if it doesn't address this issue, and it doesn't demonstrate that the country can be trusted. Investments from Spain are keeping up because they involve long-term commitments. The problem is, what is going to happen with new investments?" Malamud asks.
Alejandro Gorbacho, director of the political science department at the University of CEMA, sees things this way: "Would you invest in a country that changes its government and changes all the rules? A country that refuses to recognize what it did in the past, and does not respect its contracts? This means a lack of continuity and little predictability. Who would invest if there are other places that are more attractive, more predictable, and less risky -- such as Brazil, Chile, Mexico or Asia?"
The positive part of this scenario is, "even if Kirchner's way of negotiating with the IMF increases uncertainty in international markets, it means an 80% approval rating for him when it comes to his domestic public opinion," says Malamud.
It seems the president is playing a game with two faces. When he travels outside his country, Kirchner talks about reaching an agreement with creditor organizations and governments. Inside Argentina, Kirchner deploys his speeches that are critical of the IMF and bondholders to seduce the domestic public, and strengthen his hold on power. Surveys show his approach is on target, since it seems that almost 80% of the population approves the performance of "The Penguin." That's what they call Kirchner, because he was born in the south of the country, where such birds reside alongside glaciers.
Garcia Hamilton approves of the fact that Argentina has managed to propose a plan rather than hide the problem under the rug and postpone a solution indefinitely, as previous administrations were doing. "It's good that the country is coming out and confronting its commitments because they are eventually going to have to make a cut in the tremendous debt," he says.
At the University of Belgrano, the Center of Studies of the New Economy has put together an Index of Argentina's Ability to Pay, which measures the potential ability of the public and private sectors to deal with payments. In December, the Index showed a negative variation of 29.4% "regarding Argentina's ability to deal with larger debt payments than the government has offered," explains Beker.
Although nobody knows for sure what Kirchner will do, it is likely that he has something up his sleeve to loosen his proposal a bit and offer creditors a more appealing solution.
Pellegrini, the bondholder, agrees. Although he knows that he will not recover all his money, "I am confident that the president will make some concessions, even if he remains tough. It's also possible that some interesting possibilities will open up. If they make some payments, but include adjustments for the eventual growth of the economy, I would accept that deal because, despite everything, I have confidence in my country."
Adds Garcia Hamilton: "One of the strategies they could launch now is a 'sweetener.' It consists of a contribution in cash, never less than 60% of the debt, which is generally well accepted by private creditors. This solution could be matched with the reserves of the Argentine central bank, and it would permit the debt to drop by one-third. Those people who would not accept this kind of proposal are the AFJP, who are more interested in receiving new bonds."
"If they want to resolve this problem, the parties will look for an area of agreement that is acceptable for both sides," says Gorbacho. Considering what's at stake, and the complexities involved, the long-term impact will depend on how the situation is managed today. From my point of view, it's all about how you plan things, and what style you use when you negotiate."
Even if Argentina manages to renegotiate its defaulted debt, and somehow manages to get the IMF to approve the revision on March 9, the country's problems won't be over. Beyond that point, a lot will depend on how the economy grows, and on the new debt arrangements that go into effect as the country moves forward.
"Argentina has been raffling off its credit rating with these bonds for more than 30 years," says Muchnik. "Throughout this process, there were painful situations such as the war in the Falklands in 1982, when we were isolated from the world. The solution was always to take on more debt, creating a vicious, deadly circle. That's what we have to avoid in the future." García Hamilton worries that, once the debt is restructured in a consistent way, "they will go on squandering money on social programs. The country will be acquiring new debt faster than it can spend it, and will be in danger of going into default again."