Hours away from a midnight deadline and despite last-minute negotiations with holdout bondholders, Argentine Economy Minister Axel Kicillof announced Wednesday that Argentina will most likely go into default. While bond negotiations were going on in New York, Buenos Aires was engaged in high-level negotiations with regional partners at the Common Market of the South (better known as Mercosur) summit in Caracas, yielding similarly fruitless results. Calls for regional integration are the constant song of Latin American presidential meetings, but as Argentina's troubles demonstrate, domestic challenges and an uncertain future make any kind of international unity a difficult task.
Tuesday's presidential Mercosur summit was long overdue. Originally scheduled for December 2013, the summit was postponed several times for various reasons. Nevertheless, a range of large projects was unveiled. Venezuelan President Nicolas Maduro announced a new initiative to get the Bank of the South up and running to provide an alternative to U.S.- and European-dominated banking institutions. Maduro also proposed a regional economic bloc that would unite Mercosur, Petrocaribe and member states from the Bolivarian Alliance for the Peoples of Our America, or ALBA. Brazil's agenda in the meeting centered on promoting a free trade agreement between Mercosur and the Pacific Alliance free trade grouping.
Although sensible in principle, significant barriers complicate the implementation of the proposals. The Bank of the South (commonly referred to as the Banco del Sur) is an idea that deceased former Venezuelan President Hugo Chavez introduced as early as 2004. A baseline agreement was officially announced in 2007, and while participating countries agreed to capitalize the bank for around $20 billion, other key elements have yet to be defined.
Brazil and Venezuela have disagreed for years over the nature of the bank. Brazil argues that the Banco del Sur should serve as a way to finance large projects, in the model of the Brazilian Development Bank. Venezuela, on the other hand, has pushed for the Banco del Sur to serve as a stabilizing fund for countries with fiscal challenges, in the model of the International Monetary Fund. It is unclear at this point if the dispute has been resolved or if key details remain undecided, such as who will sit on the board or whether all members will still get an equal vote in how the bank will be administered as was earlier agreed.
For the two proposed regional economic integrations — the Pacific Alliance-Mercosur Free Trade Agreement and the Alliance for the Peoples of Our America, Petrocaribe and Mercosur regional bloc — there are a range of hurdles that will have to be surmounted before any progress can be made. Venezuela's domestic situation is in turmoil, with major protests earlier in the year challenging the government, along with skyrocketing inflation, pressure to devalue the bolivar and ongoing shortages of basic goods. For Brazil, upcoming elections mean that progress on any regional initiatives will likely be on hold until voters go to the polls Oct. 5. Furthermore, Chile is Brazil's main partner in the push to align the Pacific Alliance and Mercosur, and Chilean President Michelle Bachelet was not even able to attend the Mercosur summit July 29 due to ongoing political debates at home.
And then there is the proverbial elephant in the room: The country with the most consistent recent history of disrupting trade ties — thereby causing international turmoil — is Argentina. At the time of this writing, the possibility of a last-minute deal that would prevent Argentina from entering technical default on a bond payment that was due June 30 has all but faded. A group of banks in Argentina unsuccessfully offered to buy the bonds owned by holdouts still demanding full repayment from the default that resulted from the 2001-2002 economic crisis.
For its part, Argentina's strategy to date has been clear: Delay as much as possible while introducing persistent legal ambiguity. The same is true in Argentina's regional relationships, with Buenos Aires imposing stringent restrictions on trade even within Mercosur and standing firmly between Brazil and its desire for a free trade agreement with the European Union or the Pacific Alliance. As with the holdout negotiations, Argentina is in economic crisis management mode. With a significant balance of payments problem, the country cannot afford to loosen restrictions on international transactions and trade. And with Argentina unable to budge, the region's trading blocs will remain gridlocked.
This snapshot of Latin American barriers to cooperation is hardly unique, and next year it may look altogether different, particularly if Argentina manages the return to capital markets that is its medium-term goal. But the fundamental fact remains: Latin American countries remain dependent on and in competition for foreign sources of investment and foreign consumer markets to drive growth.
Latin American governments, on the whole, are bound by strong commitments to domestic constituencies. A lack of resources to be shared results in ever more complex schemes of management — of trading regimes, investment programs and international cooperation, all of which must be balanced as Latin American countries seek to protect domestic wealth while attracting investment. In search of wealthy international partners, Latin America continues to look outside the region. Traditionally, Latin America's partners have been in Europe and North America, but as a flurry of visits from Japan, China and Russia demonstrate, the world's horizons continue to broaden and Latin American commodities and domestic markets hold much promise for the future.
