The credit crunch claims its biggest victim - Argentina
By
Associate Editor
David Stevenson Oct 23, 2008
Print this article
Cristina Kirchner: "protecting" retirees.
The credit crisis could be about to claim its biggest victim so far. It started with subprime borrowers, moved on to banks and has now progressed on to whole countries. Iceland has already virtually thrown in the towel, and now Argentina has returned to the verge of bankruptcy.
It's all further proof that the 'de-coupling' concept is a load of junk, as well as another big sign that the 'crunch' is a very long way from reaching the finishing straight.
And Argentina won't be the last country to succumb…
Argentina has returned to the verge of bankruptcy
Iceland clearly didn't have its troubles to seek. Any country with gross domestic product (GDP) – i.e. annual output - of $20bn, but whose banks owe almost three and a half times that amount in foreign debt, is in very hot water indeed.
But Argentina's a different kettle of fish altogether. Its GDP is roughly 13 times the size of Iceland's – yet for the second time this decade, it looks like the country's creditors could be unlucky.
Though perhaps unlucky's not the right word. Naïve, or just plain daft, might be a better one. That's because Argentina has form, and quite recent form at that. In December 2001 it reneged on its $95bn of sovereign debt.
At the time, that was the biggest default in world history, though these days such a number looks like chicken feed compared with what the world's bankers have recently managed to mislay. Only in 2005 did Argentina sort the final details, with a 'take-it-or-leave-it' 70% 'haircut' on face value, again the largest sovereign debt markdown ever.
Three years later, it's back to square one. Inflation is rocketing (some estimates put it at 20% annualised) and the government is once again running out of cash. Argentina's borrowing needs will swell to as much as $14bn next year from $7bn in 2008, says RBC Capital Markets. And any confidence that the country will be able to repay what it owes is fast flying out of the window.
Argentina's 8.28% government bonds are due to be redeemed in 2033. Fat chance of that, the way things are looking right now. Now priced at 22 cents on the dollar, they currently yield 31%, as against 'just' 12% a month ago. And still no one wants them.
What's more, the price of credit default swaps – market insurance that investors can buy to protect themselves against default (See All you need to know about credit default swaps for more) - covering the country's sovereign debt has more than quadrupled over the past month. These CDS now stand at more than three times the Icelandic level, and suggest there's almost a two to one chance that Argentina will go bust this year.
Enjoying this article? Sign up for our free daily email, Money Morning, to receive intelligent investment advice every weekday. Sign up to Money Morning.
The state plans to nationalise private pension funds
In fact, things have now got so bad that the state has decided to take over $29bn of the country's privately managed pension funds to get its hands on some cash. This is being presented as an emergency move to meet financing costs that have soared as commodity prices have tumbled.
In a breathtaking piece of bravado, President Cristina Kirchner said the proposal would "protect" retirees from the global financial crisis, according to Bloomberg, while denying she was trying to "grab the cash" to pay off debt or to finance new programmes or projects. Pull the other one. The last time Argentina sought to tap into workers' savings was just before that 2001 default.
For now, the funds being targeted are 'just' retirement accounts, but the entire $97bn pool of private pensions contains a lot of juicy and much-needed hard currency. Understandably, this hasn't gone down at all well in the money markets. "It's the final of many nails in the coffin from an institutional investor perspective," said Bill Rudman at WestLB Mellon Asset Management. "Argentina is disappearing into irrelevance".
It's all a classic sign that the de-coupling concept – whereby some areas of the planet remain unaffected by the woes of the rest of the world – is as big a load of junk as all those Argentine bonds. At least the country's track record means it's been shut out of international capital markets, so that even the most gullible lenders should have avoided loading up on its dodgy debt.
Could Gordon Brown soon be importing the Argentine model?
But Argentina's problems also show that the credit crisis still has a long way to run. So is it a harbinger of similar dangers elsewhere?
As the recession bites harder, more governments will start to find out that their tax take is on the slide. What's more, bond markets aren't going to be very keen on making up the revenue shortfalls, as least at the sort of cost that taxpayers will be happy to pay. So with state coffers under siege, there could be more of this sort of appropriation in the pipeline.
"The G7 states are already acquiring an unhealthy taste for the arbitrary seizure of private property", says the Telegraph's Ambrose Evans-Pritchard, "it's a foretaste of what may happen across the world".
Already governments in the US, Britain, and Europe have got the taste for meddling in the markets under the guise of 'saving the system', such as taking stakes in banks that rank above the existing owners, and then telling these banks how much to lend. And those same governments have shown themselves quite prepared to bend the rules if they think they can get away with it, like letting bank mergers go through regardless of so-called competition rules.
There have already been vague mutterings about government-backed hedge fund bailouts, to stop the stock markets sliding. So if the excuse arrives to 'help out' the odd pension fund or two, what are the odds of Gordon Brown importing the Argentine model and finding a way to hoover up some of the available cash? It may not seem likely right now, but then a year ago, nor did the nationalisation of half our banking system.
Our recommended article for today
Why making things could come back into fashion
One result of the financial crisis may be that our focus will shift to things we need, rather than things we want. And people may return to investing in simpler, more tangible things.
Published in
Economics
| More
articles
by
David Stevenson
Related articles
-
By David Stevenson, Oct 29, 2009
-
By John Stepek, Oct 28, 2009
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.
