Please Take Note: Argentina Has Defaulted

Having covered many times the Perils-of-Pauline saga of the Argentina debt crisis (for example, here, here and here), it is appropriate to take note that Argentina has now officially defaulted on is so-called "exchange bonds."   Holders of the exchange debt were supposed to receive a payment on July 30, and Argentina deposited the money with Bank of New York Mellon, but orders of a federal judge in Manhattan prevented BNYM from distributing the money to the bondholders unless Argentina also paid holdout creditors from previous issuances, which Argentina was not willing to do.  On July 30 Standard & Poor's announced that Argentina had defaulted; and subsequently the International Swaps and Derivatives Association declared that Argentina's failure to pay had activated the credit default swaps on Argentine debt.  See New York Times Dealbook summary here.  That's about as official as it gets.

A roundup here from Fact Check Argentina notes that Argentina continues to maintain that it has not defaulted.  Their theory is that the deposit with BNYM ought to be good enough, even if the bondholders didn't get the money.  Obviously, S&P and ISDA are not buying it.  Meanwhile Fact Check Argentina notes that the latest tactic of Argentina's lawyers from Cleary is to blame the court-appointed mediator, Dan Pollack, for failing to achieve a settlement.  Without knowing who offered what, it's hard for me to lay blame, but I will note that Pollack is a very respected guy in this business.

The whole saga of the bonds is of course a great distraction from what is happening in the underlying Argentine economy, where every kind of bad policy (crony capitalism on steroids, wild monetary expansion, exploding inflation, high trade barriers, subsidies for many basic services) continues to wreak havoc.  Here's a roundup from the Economist on June 27.  It seems that Argentina's economy has entered recession, based on 4Q 2013 and 1Q 2014 economic shrinkage -- in other words, that had already occurred well before the bond default. 

Many of Argentina’s problems are familiar. Inflation has plagued Argentina for much of the past decade; it still grew by an average of 5.6% from 2005-2013. Exchange and trade controls have long made it hard to get hold of primary materials, stifling production. But whereas in the past Argentina could maintain growth by propping up the peso and consumers’ purchasing power, falling foreign-exchange reserves mean it can no longer afford to do so.

Is the bond default even a negative for Argentina's economy?  If it is, it's a very small part of the problem.  Indeed, if it has the effect of imposing even a little discipline on the populist vote-buying culture of Argentina's political class, it might even do some good.