Today wasn’t a very good day for the world’s investment markets. Bank woes in Portugal; a default in Argentina; conflict in the Ukraine and the Gaza Strip, and the specter of a less accommodating Federal Reserve have investors headed for the turnstiles.
In and of themselves, the dollars amounts in Argentina and Portugal don’t amount to much on a global scale. The Palestinians and Israelis have been fighting each other for years, as have the Ukrainians and Russians. For its part, the Fed has been monkeying around with the US money supply since its existence. In so many ways, when you add up all the bad news in the world today, you know, it really seems overwhelming. However, perhaps the world hasn’t changed as much as the speed with which we get information.
In the end, it seems the world’s woes are almost always about: 1) money, and; 2) people not liking each other very much. Hmm. I wonder if there is historical precedence.
Now, much has been written about the Ukraine, Russia, the Gaza Strip, and I have analyzed the Portuguese bank mess for you. But the Argentine default was/is a relatively new headline, and I want to be able to share some insight. After reading a number of articles on the subject and, frankly, not quite comprehending why all the wringing of hands & gnashing of teeth, I came across an article by Mohamed El-Arian, who used to be the CIO at PIMCO, and is now at Allianz. I liked it so much, I decided to not reinvent the wheel.
Please find his article from Bloomberg.com below.
“Argentine Default Creates Many Losers By Mohamed A. El-Erian”
Despite frantic last-minute negotiations, Argentina and its holdout creditors have failed to reach a deal that would allow the government to make timely payment on its sovereign debt. As a result, the country has solidified its standing as one of the world’s worst serial defaulters.
Argentina, as a nation, is the biggest loser. It will have a much harder time borrowing money on international markets, and will pay more to do so. Foreigners will be discouraged from making direct investments and Argentines will be encouraged to take money out, further limiting the country’s growth potential.
The country’s worsening economic and financial conditions are bad news for the government of President Cristina Fernández de Kirchner. With their credibility already weakened by perceptions of incompetence and corruption, the authorities will find it even harder to govern a country that is operating well below its potential, undermining the well-being of both current and future generations of Argentines.
The majority of Argentina’s creditors are also big losers. They went along with earlier restructurings as a way of helping the country regain its stability and, in the process, securing their financial claims (albeit at a discount from the original contractual face value). What they failed to factor in is that, using the U.S. legal system, a minority of holdout creditors would succeed in stopping payments on the restructured debt.
The emerging markets asset class is also worse off. The Argentine debacle is sure to encourage initiatives by the international community to reduce the chances that minority creditors will be able to wreak similar havoc in the future. The result will be an erosion of creditors’ rights.
The holdouts may not be as well off as they think. Yes, they took Argentina to the brink and demonstrated their legal power and strategic smarts. But their approach of forcing a generalized sovereign default could well reduce the net present value of their claims on Argentina. In the meantime, they will incur significant legal expenses on top of an already large bill.
Still, not everyone lost out. Lawyers will make lots of money, as will the bankers who will be engaged in trying to resolve what will be a mess of defaulted obligations.
Then there are the few astute investors who refused to go along with the conventional wisdom that rationality would ultimately prevail. Rather than assume that an agreement would be reached in order to avoid a “lose-lose-lose” outcome, they predicted that the very entrenched and — by now — quite dogmatic negotiating parties would fail to resolve the main issues. They were right, and by betting on default (mainly using credit default swaps), they are now set for a handsome payoff.
The gains of lawyers, bankers and a few contrarian investors pale in comparison to the damage that will now be inflicted on the Argentine population if some miracle doesn’t transpire. Surely there was a better way for creditors and debtors to interact.
[To contact the author of this article: Mohamed A. El-Erian at M.El-Erian@bloomberg.net.]
So, when push comes to shove, it isn’t a different world we live in. We are just now more painfully aware how different it really is…