Tuesday, 2 September 2014



Following the failure of last-ditch talks between ARGENTINA and holdout hedge funds on 30 July 2014, ARGENTINA’S economic minister said his country would "imminently be in default" of its debt. ARGENTINA continued to owe debt to private bondholders.

Ninety-two percent of the defaulted USD 82 billion of private debt had been swapped for a mix of new bonds with a substantial loss in net present value. These creditors agreed in 2005 and 2010 to write off 70 percent of the money they were owed. Some hedge fund bondholders, known as the “holdouts,” did not participate in the swaps and continued to pressure ARGENTINA via the US courts to settle its outstanding debt for the actual amount they are owed plus interest.

By July 2014 ARGENTINA said it would make another effort to reach a deal with a group of US creditors to avoid a possible default on its debt, the second in 13 years. A US federal judge did not allow ARGENTINA to make a scheduled payment to those bond holders unless it paid the hedge fund creditors as well. ARGENTINA was in a bind because it could not pay some bondholders different amounts without getting sued.


It was not immediately clear how the default would affect the ARGENTINE economy, already in a recession and with one of the world's highest inflation rates. The US credit ratings agency Standard & Poor's downgraded ARGENTINA'S long- and short-term foreign currency credit rating to so-called "selective default". Selective default acknowledges that ARGENTINA is current on payments to some creditors and is probably able to make some payments on the debt it had defaulted on.

By 2014 ARGENTINE President CRISTINA FERNANDEZ'S government was struggling with high inflation, anemic economic growth and falling central bank reserves. ARGENTINA’S economy slid into contraction in the January to March quarterfor the first time in nearly two years as the country faced high inflation as well as weak exports to neighboring BRAZIL. Consumer prices climbed by 12.9 percent in the January to May period of 2014, while ARGENTINA’S international reserves shrank by 25 percent in the previous year to $28.9bn. ARGENTINA'S inflation rate was estimated by many private-sector economists to be around 30% a year.

In January 2014 the US Federal Reserve began scaling back monetary stimulus, and investments began flowing back into advanced economies as interest rates began to rise. ARGENTINA’S central bank chose not to intervene - resulting in the ARGENTINE peso’s biggest depreciation in more than a decade. The contagion spread quickly to other emerging markets, leading some economists to call it the "biggest sell off in emerging market currencies since 2009." ARGENTINA had domestic inflation that was running very high and was disguised by the official figures. By mid-2013 consumer prices in ARGENTINA were rising by about 25 percent annually, while the peso currency's black market rate was 48 percent weaker than the official rate.

After several years of publishing non-credible statistics, ARGENTINA’S official statistics agency (INDEC) released substantially revised inflation and GDP growth data that are closer in line with private estimates. The IMF had formally censured ARGENTINA in February 2013 because of manipulation of inflation and GDP data. As of mid-2014, the IMF had not yet released its conclusions regarding its review of ARGENTINA’S new data.


a highly educated population, a globally competitive agricultural sector, and a diversified industrial base. But by late 2013 inflation was estimated by private economists at around 25 percent, while foreign exchange controls had cut access to US dollars, ARGENTINA'S traditional currency of choice for savers. The peso currency's black market rate is about 50 percent weaker than the official rate. Import controls made it hard for some businesses to get basic supplies needed for production. President CRISTINA FERNANDEZ increased the role of the state in LATIN AMERICA'S No. 3 economy and is roundly criticized by business for imposing heavy trade and foreign currency market regulations that hurt investor confidence.


After a 9.2 percent growth rate in 2010, and 8.9 percent in 2011, in 2012 the economy only grew by 1.9 percent in a context of a persistent drought that impacted heavily on agricultural output. 

Strong economic activity recovered in 2013 presenting for the seven first month of the year a 5.7 percent growth rate year-on-year, fueled by the construction and industrial sectors, a good harvest and growing exports. 

Exports grew by 5 percent during the first 6 months of 2013 compared with the same period of 2012, while imports grew by 11.3 percent, the trade surplus accounted for almost US$ 5 billon.


Between 2003 and 2012, GDP doubled, with an average annual economic growth rate close to 7.2 percent, which constituted the highest average growth rate achieved in the country’s economic history for such a long period. More importantly, this unparalleled economic growth wasn socially inclusive, reflected in a clear reduction in poverty, unemployment, and inequality, making ARGENTINA’S GDP PPP per capita one of the highest in Latin America.

Between 2003 and 2012, ARGENTINA'S government strongly believed that equality was an important ingredient in promoting and sustaining growth. Since 2003, key components of ARGENTINA’S growth model were the creation of quality jobs, the progressive reduction of inequality, social inclusion and better income distribution. 

During this period, 64 percent of new firms were set up; that is, almost 200,000 firms in industry, commerce and other services. 

Around 500,000 new jobs were created each year, and unemployment thus was reduced by 67 percent, decreasing from 18 percent in 2Q 2002 to 6.9 percent in 4Q 2012, with a strong increase in employment formalization. 

The number of workers with a formal job paying social security contributions grew by 92 percent during this ten-year period and the minimum wage grew to be the largest in LATIN AMERICA. In turn, the average real wage increased by more than 37 percent and, as a consequence, the participation of wages in total income which was on average 40.2 percent in the period 1993-2001, increased to 54 percent in 2012. 


The end-result was a historic increase in living standards, which is reflected in the doubling of the middle-class between 2003 and 2009, as found by a report by the WORLD BANK. The report shows that in 2003, only 24 percent of the population, that is 9.3 million inhabitants, were part of the middle class, whereas in 2009, the middle class increased to 46 percent of the population, which is 18.6 million inhabitants.

The move after the 2001-2002 crisis to a more flexible exchange rate regime, along with sustained global and regional growth, a boost in domestic aggregate demand via monetary, fiscal, and income distribution policies, and favorable international commodity prices and interest rate trends were catalytic factors in supporting 5 consecutive years of greater than 8% annual GDP growth between 2003 and 2007. 

That economic recovery enabled the government to accumulate substantial official reserves (over $51 billion as of late August 2010). The reserves, combined with the absence of fresh borrowing from the international capital markets, helped insulate the economy from external shocks. A higher tax burden, improved tax collection efforts, and the recovery's strong impact on tax revenues supported the government's successful efforts to maintain primary fiscal surpluses since 2003.


Global financial turmoil and rapid declines in world commodity prices and economic growth during 2008 and 2009 resulted in diminished domestic growth in 2008 and a mild recession in 2009. These factors as well as some changes in trade policy in late 2008 and in 2009 had an impact on foreign trade, with imports and exports falling 32% and 20% annually, respectively, in 2009. 

While the economic downturn was less severe in ARGENTINA than elsewhere, the deterioration of both domestic and international demand complicated the fiscal situations of both the federal government and the provinces. The global economy’s current recovery is helping to ameliorate some of those pressures.

Official figures show that ARGENTINE GDP reached U.S. $380 billion in 2010, approximately U.S. $9,400 per capita, with investment increasing an estimated 10% for the year and representing approximately 22% of GDP. 

Analysts estimate that 2010 GDP growth was 7.5%. Government of ARGENTINA statistics showed unemployment was 9.7% in 2010. Poverty dropped in the aftermath of the economic crisis of 2001-2002, after it reached a record high of over 50%. In 2010, the official poverty level was 12%. Some unofficial estimates suggest that unemployment and poverty levels may be higher.

ARGENTINA'S exchange rate policy is based on a managed float, with an average exchange rate of 3.89 pesos per dollar in 2010. The rate in early June 2011 was 4.10 pesos per dollar. According to market analysts, the peso's real exchange rate has been undervalued in previous years, which, when combined with high global commodity prices, helped lift export volumes and values to record levels. ARGENTINA had a $1.82 billion trade surplus in early 2011.


and played an increasingly important role in ARGENTINA'S economic development. Exports totaled approximately 18% of GDP in 2009 (up from 15% in 2002), and key export markets included BRAZIL (18.78%), EU (17.7%), China (9.26%), U.S. (6.38%), and CHILE (7.11%). Two-way trade in goods with the U.S. in 2009 totaled about $9.4 billion according to the U.S. International Trade Commission. Total two-way trade in services in 2009 was $5.1 billion (according to the Bureau of Economic Analysis, U.S. Department of Commerce). The production of grains, cattle, and other agricultural goods continues to be the backbone of ARGENTINA'S export economy. High-technology goods and services are emerging as significant export sectors.


Continuing ARGENTINE arrears to international creditors and a large number of arbitration claims filed by foreign companies are legacies of the 2001-2002 economic crisis that remain to be resolved. Outstanding external debts included over $6.3 billion (not including interest and penalties) owed to official creditors according to Government of ARGENTINA statistics, including about $500 million owed to the UNITED STATES. From May to June 2010, the Government of ARGENTINA offered a debt restructuring for private holders of defaulted bonds. Two-thirds of the private bondholders participated, leaving approximately $6 billion in private default claims still outstanding.

Nearly 500 U.S. companies are currently operating in Argentina, employing over 155,000 Argentine workers. U.S. investment in Argentina is concentrated in the manufacturing, information, and financial sectors.

Interesting to note is that the  so called Argentine "opposition" blames the current government for the second "technical default" in 12 years where as the making of this and the previous crisis was accelerated  by former President Menem and his administration and last but not least the military Junta before him. 
The problem is that the current government objects the terms and doctrines set by the international financial community and managed to succeed with its  financial - economic doctrine, infuriating the Anglo - Saxon Financial institutions. The question is which way will ARGENTINA head after the elections in 2015? The options look grim, with either a ultra right  government, selling the country once again out to the "International establishments", as did MENEM, or a  "conservative" government under the umbrella of the " Naroc Cartel" ............................



1 comment:

  1. Hi Ray,

    Thanks for the article. Some comments:

    1) Mr Kicillof (Economic Minister) never said that Argentina will "imminently be in default". In fact he stressed endless times that Argentina deposited its payments on time so the default criteria are not met. It's an important nuance because a journalist cannot start an article posting inaccurate info.

    2) Statistic info on inflation has always a political side, and unfortunately governments tend to undervalue them (high inflation is considered to be a failure in economic policies) while those in the opposition and in particular lobbying groups (unions, export-oriented corporations etc.) try to overvalue it to either force devaluation of the Peso or to raise minimum wage.

    Kirchner's government manipulated too much the inflation figures in order to minimize interest payments on restructured bonds, since these are tied to official inflation values. At the same time, private forecasts were clearly politically oriented, providing exaggerated numbers without any significant population data to backup it.

    All this to say that private estimations are not necessarily accurate. The truth lies perhaps in between the government and private figures.For instance, current official inflation figures are around 25%/yr now, but the private consultants now inform 50%/yr.

    3) An important trend to mention when analyzing Argentine exports during the last 12 years is that manufactured goods became an increasingly higher percentage of total exports, to the point that sometimes industrial-derived exports advance agricultural-derived exports for some quarters. Still Argentina is far from being an industrial export powerhouse (such as Taiwan or Korea) but this trend doesn't please foreign investors since many still believe that resource-rich countries such as Argentina should focus on exporting crops and importing manufactured goods. The Kirchner administration opposes this view.