Post date : 11.17.2014 8:30 am
Last week, the Financial Times reported on the declining gap between the value of Argentina’s peso to the U.S. dollar – the so-called “blue dollar” rate. This summer, following Argentina’s decision to default on bonds after losing its appeal at the Supreme Court, the blue dollar rate reached an all-time high. This currency gap has been closing in recent days.
But let’s take a look at what’s driving these mildly positive trends: From last week’s news coverage of the economic situation in Argentina, it seems clear that the main driver is market expectations that Argentina will negotiate a settlement with its creditors once the RUFO clause expires. The FT noted this very dynamic in its story.
We’ve written about the RUFO clause before, and we still maintain that it’s nothing more than a smokescreen concocted by Argentina’s lawyers at Cleary Gottlieb aimed at preventing any negotiation with creditors.
Nevertheless, if Argentina’s leaders are truly eyeing a settlement with creditors once RUFO expires, that’s a good thing. Clearly, many investors and news commentators are taking reports of this possibility at face value and are expecting Argentina to come to the negotiating table at year’s end. Chatter to this effect has picked up in recent weeks, accompanying the uptrend in Argentine economic indicators.
“Creditors who own bonds left over from Argentina’s default in 2001 are growing increasingly confident the government will negotiate once a clause that it says prevents a settlement expires next month.” – Bloomberg News, November 13
“Many investors expect the government to settle with the hedge funds early next year.” – Wall Street Journal, November 13
” … market players are optimistic that negotiations with Argentina’s so-called holdout creditors will resume in January, which could lead to a deal by March or April. That would enable Argentina to borrow on the international capital markets again, putting an end to its dollar drought and the need for an abrupt currency adjustment.” – Financial Times, November 13
It’s absolutely clear that market expectations for a settlement are driving the recent positive trends in Argentina. Moreover, the mild economic benefits that have accrued to Argentina in recent weeks based on growing expectations of a settlement pale in comparison to the benefits that Argentina could see if they actually came to the table and achieved a settlement in January. As Claudio Loser of the Inter-American Dialogue has pointed out, these benefits include:
– 1% growth in GDP
– Up to $70 billion in lower interest costs
– Billions in savings for businesses
– Lower inflation
– No need for capital controls
– An improvement in real wages
Clearly, markets are sending a strong signal to Argentina: Do the right, rational thing, negotiate a fair resolution, and reap the benefits of a normalized relationship with the rest of the developed world.