Argentina Lets Default Clock Run Out

But even a default won't stop this soap opera.


This story has been updated. 

Argentina missed a midnight deadline to either reach a deal with its creditors or begin paying them off. The country did neither, marking the eighth default in its history, but the story doesn't end here.

"Anybody who's hoping for closure when this negotiation ends [Wednesday night] will be disappointed," said Barbara Kotschwar, an economist who studies Latin America at the Peterson Institute for International Economics. "Even if we have a default, this isn't over."

Argentina got to this point because it won't pay the creditors that President Cristina Fernández de Kirchner has accused of extorting her country. In June, the U.S. Supreme Court refused to hear Argentina's last appeal, compelling it to comply with a federal court order to pay the so-called "holdout" bondholders at least $1.33 billion. The holdouts are creditors who refused to accept lesser payments after Argentina's 2001 default. Argentina has argued that it can't afford to pay them and the 92 percent of creditors who previously agreed to exchange their bonds for cents on the dollar.

The financial press has rapaciously followed the cat-and-mouse game between Kirchner and hedge fund NML Capital for decades. Investors have tracked every twist of the intrigue as the bondholders have pursued Argentina's assets from Buenos Aires to New York to Ghana. The raciest story in sovereign debt, for sure.

And the hours leading up to the July 30 midnight deadline haven't disappointed. Although default was still widely expected Wednesday afternoon, the story line was filled with impromptu plot developments. In the morning, Argentina's banking association, Adeba, reportedly was putting together a deal to buy the hedge funds' bonds, according to the Wall Street Journal. By midday, Reuters reported that Argentine Economy Minister Axel Kicillof was spotted entering the court-appointed mediator's office to try to strike an eleventh-hour deal. With every new development, Argentina's investors saw hopes of averting default, and bonds bounced to new highs. Then, late Wednesday afternoon, ratings firms Standard & Poor's cut Argentina's rating to "selective default" as talks continued.

But no matter what happens, Argentines will have to deal with the consequences, which for Kirchner's government may feel a little like the movie Groundhog Day. This default is inexorably tied to one in 2001 when the country stopped paying on $95 billion worth of bonds. Shocked Argentines stampeded to their banks only to learn that the government limited how much they could withdrawal. Then they watched with dismay as the peso's value plummeted and their savings dwindled.

Luckily for Argentines, this time is not expected to be so bleak.

"Default is not as bad as it sounds for anybody who lived through the 1980s and 1990s and early 2000s," said Kotschwar. "It's not ideal, but it wouldn't be as devastating."

Economists are even more blasé about what effect another default would have on the international economy, partly because it has been a long time coming. Default has been a strong possibility since the Supreme Court ruled against Argentina in June, effectively putting an end to the country's legal options.

"This is the slowest-motion train wreck ever," said Anna Gelpern, a Georgetown University law professor and expert on debt contracts. "If you didn't see it coming, you've been living in a deep dark hole."

If Argentina defaults, bond values will likely fall, perhaps by as much as half, but probably not drop all the way to zero. That means they can be resold, and new bondholders will want to get paid. If Argentina wants to rejoin the international capital markets, it will have to find a settlement with those new creditors.

In 2001, the value of Argentina's bonds fell to 30 percent of their original value. So-called "venture funds" thought that sounded like a pretty good deal, bought up the bonds, and then launched a protracted legal battle to make the Argentine government pay them the bonds' full value, bringing the saga to this cliffhanger moment. Argentina could be back here in six to nine months, some observers say.

This lack of progress makes economists cry for Argentina. It has so much potential, they say; it has vast natural resources. But somehow, it can't seem to get ahead.

"In the mid-1800s, Argentine GDP per capita was the same as the U.S. or Canada, but since then, it has consistently gone down," said Kotschwar.

The country's willingness to renege on its debts -- the pending default would be Argentina's eighth -- could scare off the foreign investors it needs to help develop its economy. Investors have flocked to Argentina nonetheless because of its abundant oil and gas resources, but some worry politics will now get in the way.

"The economics are boring. It's so easy to figure out how to settle this. It's the politics" that are the problem, said Robert Kahn, a senior fellow at the Council on Foreign Relations.

And default could even have a political upside, he said.

"After a default, they can blame their troubles on those nasty international markets and U.S. courts, when in fact these problems are all self-generated," Kahn said.

Photo by LEO RAMIREZ/AFP/Getty Images


Fight Over Kurdish Oil Spreads to Texas Court

The dispute between Baghdad and Erbil over Iraqi Kurdistan's oil exports has steadily ratcheted up this year. Now they are fighting in court over $100 million of oil anchored outside of Houston.

The age-old dispute between Iraq's Kurds and its central government has found the unlikeliest of new battlegrounds: a Texas courtroom.

In a contentious lawsuit, Baghdad and its semiautonomous northern region are waging a legal battle that's nominally about the ownership of a million barrels of crude oil sitting in a tanker parked outside the Houston Ship Channel. The real issue, however, is the future of the Iraqi state.

Simply put, the hard-pressed Kurds are desperate to sell their oil to replace revenue they used to receive from the central government. But Baghdad is doing everything in its dwindling power to prevent such self-sufficiency. Its legal threats have cast a pall of uncertainty over Kurdish oil, which is discouraging potential buyers around the world. And that is inexorably pushing the Kurds further away from reconciliation with the Shiite-led regime in Baghdad and closer to open independence.

So far, the United States government hasn't done much to resolve the impasse. It urges the Kurds and Baghdad to work together and to maintain unity, especially in the face of the threat from rampaging Islamic militants. But Iraqi Prime Minister Nouri al-Maliki, a sectarian Shiite, isn't offering any political concessions to Iraq's other political groups, especially the Kurds, which is thereby inflaming tensions. For instance, earlier in July, Kurdish troops seized Iraqi oil fields after Maliki allegedly ordered the destruction of oil pipelines there.

The United States has somewhat sided with Baghdad by pushing the Kurds to market their crude through the central government, though it hasn't actually told prospective buyers to stay away from the stuff.

People close to the Kurdish regional government in Washington, D.C., said that the Kurds will share future oil revenues with Baghdad. They also say that Maliki's unrelenting stance on Kurdish oil exports is counterproductive for the whole country, especially during such a dire time.

Clarifying the legal status of Kurdish oil will only get more important: Goldman Sachs, the investment bank, said Wednesday that the Kurdish region could double its oil production to more than 500,000 barrels a day by the end of 2015 if it can sort out the legal quagmire.

The Texas case began when the United Kalavryta, one of four oil tankers filled with crude pumped in Iraqi Kurdistan this year, rounded the Florida Keys over the weekend and headed for Galveston, Texas. The ship, which had been wandering the waves for a month searching for a buyer for its cargo, seemingly had found one. Baghdad considers that both illegal and an affront to the nation's unity, and quickly pounced.

The Iraqi Oil Ministry filed suit Monday in the Southern Texas District Court against two co-defendants: "the 1,032,212 barrels of crude oil" -- worth $100 million -- and the Natural Resources Ministry of the Kurdistan Regional Government (KRG). According to the suit, the oil was stolen from the people of Iraq. Under the Iraqi Constitution, all oil produced in Iraq must be sold through the federal government.

"Accordingly, the cargo belongs to the people of the Republic of Iraq," Baghdad's lawyers argued before the court. They asked the U.S. judge to interdict the shipment. Late Monday, she did. U.S. marshals stand ready to seize the cargo as soon as the behemoth ship actually enters U.S. waters and tries to unload. As of Wednesday, the ship's cargo remained in limbo.

Not so fast, countered the Kurdish regional government in a letter to the court sent late Tuesday. The oil was pumped in Kurdistan. According to Erbil's reading of the Iraqi Constitution, that makes it Kurdish oil.

What's more, lawyers for the Kurdish government said, U.S. courts have no jurisdiction to determine who owns what, especially since Iraq's Supreme Court already smacked down the Oil Ministry's attempts to stop Kurdish oil sales until internal Iraqi political disputes are settled. The long-simmering fight between the central government and the restive northern region has no place in a Texas courtroom, they said.

"The Ministry of Oil is seeking to export this internal constitutional dispute," lawyers for the Kurdish regional government wrote. "Given its significance and political implications, the KRG believes that this dispute cannot be resolved by a foreign court without the KRG's consent."

The U.S. judge appeared to agree with that sentiment. "Seems to me this is not a matter for the U.S. courts to tell the government -- the governments -- of Iraq who owns what," said Judge Nancy Johnson. "This just seems way outside our jurisdiction," she said on Tuesday, according to the Wall Street Journal.

In the fight for the $100 million worth of crude, the Kurdish government is throwing down much, much bigger numbers at Baghdad and raising the stakes substantially.

Under the Iraqi Constitution, Baghdad must share revenue from oil exports with different regions of the country; the Kurds are entitled to 17 percent, which they say they haven't seen. The Kurds say that Baghdad owes them $27 billion in back payments, including $7 billion for this year.

What's more, the Kurds are still seeking compensation for damages incurred under the previous central government regime of Saddam Hussein, including "war crimes, genocide, and economic misery," their letter says. "The full damages suffered by the KRG and Kurdistan are not less than $384 billion."

Finding a way to finally sell its oil, especially the cargo in limbo, is crucial for the Kurds -- and the rest of the country. The Kurdish regional economy is in a bind since Baghdad cut off the oil-revenue spigot. The financial strain of caring for more than 1 million Syrian refugees and internally displaced persons from the Islamic State rampage through parts of northern Iraq is seriously straining Erbil's already precarious finances.

Safin Hamed - AFP - Getty