Don't Cry For Yourself, Argentina

If you default on your mortgage payments, you may be able to renegotiate a new deal with the lender to restructure the debt and your payments.  If you can't reach a deal, the lender will foreclose and you lose your house/land.  That's the risk you took when you signed the contract.  simple.  Straightforward.  But if you're a country like Argentina, you may be able to spin the default into a political advantage.  Here's what happened.

Back in 2001, Argentina defaulted on $100 billion owed to foreign investors.  A new deal was restructured that gave new investors a terrific interest rate advantage and a guarantee to repay the $100 billion principal.  Argentina also agreed that the contracts to pay interest and principal would be governed by U.S. law.  This gave investors an added sense of security.  Fast forward to 2014 when Argentina defaulted on a $539 million interest payment.  President Cristina Kirchner cried poverty;  most investors accepted a repayment of principal at 30 cents on the dollar.

But Paul Singer, a hedge fund manager from New York, refused to go along with the deal.  Under the terms of the 2001 restructured contract, he took Argentina to an American Federal Court...... and he won.  The court ordered Argentina to repay the entire $1.5 billion owed to Mr. Singer's fund.

President Kirchner refused to pay and tried to spin Paul Singer's victory into a "war"  against Wall Street and the evil "vulture funds"  run by "foreigners".  she said, "We've become a viable country again.  That's why they want to bury us".  All this hysteria against "money - grubbing capitalists"  has gained traction with some Argentinians.  Television news media show demonstrators marching through the streets of Buenos Aires in support of President Kirchner standing up to these foreigners.  But they fail to see 1)  Argentina has the money to make the interest payment ($539. million)  2)  the total debt of $100 billion is not due yet  3)  Argentina has a weak economy, inflation is running at a rate of 40% and their currency is heavily devalued (since last August, for example, the Argentine peso has lost 40% of its value against the Canadian dollar).  Default now will only further reduce investment and lead to more downward pressure on economic growth.

In my view, all this hysteria and phoney outrage is simply a way to distract the Argentinian people away from economic reality.  Regardless of whether this is true or not;  the government has clearly spooked foreign investors and companies from doing business in that country.  My advice to Cristina Kirchner is to do the right thing and pay the debt and by the way, don't distract the people by invading the Falkland Islands - again.