As it stands, Argentina has few options for satisfying its holdout and hedge fund bondholders. According to the original June ruling, stipulated by what is known as the Rights Upon Future Offers clause, Buenos Aires must repay its creditors in full. Naturally, the government wanted to find a way around that clause, so it planned to reissue and relocate its outstanding bonds in what was essentially a debt swap scheme meant to settle debts in Buenos Aires instead of New York. Argentina hoped that by issuing a new bond series with equal monetary benefits to any bondholder who wanted to be paid outside New York's jurisdiction, it would be able to forestall its upfront payments and stave off financial calamity.
The U.S. court clearly disapproved of that plan — hence the contempt of court ruling — and now Buenos Aires finds itself in the same position it did in June: If Argentina pays the bondholders who sued it, it will have to repay all bondholders to the tune of $120 billion. Argentina is used to being an outsider; it has been excluded from the international credit system for almost 13 years. But its reliance on internal credit for financing, combined with having to repay its bondholders in full, would lead to financial insolvency.
Unappealing Options
From here, the best move for Buenos Aires is not to move at all, at least not until the Rights Upon Future Offers clause expires Dec. 31 and Argentina's bargaining position fundamentally changes. Buenos Aires hopes it can begin repayment through its existing debt swap scheme after the new year. Perhaps then it could pay the $1.6 billion it owes to the hedge funds and the $15 billion demanded by the holdouts. This would appease the Manhattan courts and leave Argentina free to continue repayments to the rest of its bondholders. Although workable in theory, the debt swap faces practical complications, not least of which is the fact it will take time, and technically Argentina would remain in default.
This means that Argentina cannot access the funding from global capital markets it so desperately needs. Instead, it will have to use the last of its dwindling reserves, which will have to be carefully managed for the next three months. Despite canceling payments of around $4 billion in 2014, Buenos Aires is expected to honor around $11 billion of its debt obligations in 2015. Of its $29 billion in foreign currency reserves, Argentina can immediately access only $15 billion in liquid reserves because the government has not resettled its outstanding debts — a move that would restore its access to international capital markets. Only then can it replenish its central bank with fresh foreign funds and settle the rest of its upcoming payments of $7.3 billion in 2016 and $12 billion in 2017.
Otherwise, the country has few options for adding more money to its reserves. Its inability to access international financial markets has led Buenos Aires to implement several spending cuts. And although some reforms have passed, harsher cuts are likely to prove unpalatable, particularly leading into an election year. The government will have to balance its public approval ratings with its desire to protect bank reserves.
Moreover, inflation, which currently stands at 40 percent, also works against the government. Inflation has driven up demand for the U.S. dollar — the preferred currency for personal savings — reducing the value of the peso. As a result, the central bank has had to drain its currency reserves to artificially maintain the peso's value.
Beyond public spending cuts, managing inflation rates and preventing capital flight, Argentina has one cash flow option available to it for the last quarter of 2014: agricultural exports. Because the peso is so weak, Argentine farmers have been hoarding agricultural produce since the June harvest, waiting for the best time to sell. Of the 55 million tons of grain harvested this year, less than 27 million tons have been sold. Agricultural exports from Buenos Aires province alone dropped 56 percent over the first half of 2014, highlighting the fact that farmers are reluctant to sell in a bad financial climate. Argentina's stockpiled crops — mainly soy — could be worth as much as $10 billion. But large harvests in the United States could bring prices down, leading farmers to speculate on when to sell, balancing commodity prices against the peso.
Notably, the central government passed what is known as the supply control law Sept. 18, giving the state authority to force sales of hoarded grain. Again, Buenos Aires will need to be judicious and weigh its need for additional funds against the risk of enraging one of the largest unions in Argentina. Too much pressure on the farmers could provoke a violent reaction in the rural areas, while a sharp devaluation could aggravate inflation and trigger social unrest, especially in urban areas.
But Argentina has perhaps one more option: finding a third party to act on its behalf. If Buenos Aires can find such a party to cooperate with the holdouts and hedge funds, it could ignore any pressure to pay the holdouts in full. This would buy some time in the short term, but it would do little to assuage the international pressure on Argentina in the long term. In any case, finding a third party to effectively bail out the Argentine economy is no small task, and it would likely require the services of a premier financial institution such as JP Morgan. (Interestingly, Argentine President Cristina Fernandez de Kirchner met with George Soros in New York on Sept. 22, though details of what the two discussed have not been released.)
Any option that would appeal to Argentina has expired, and now the government has no choice but to endure its financial hardships for the next few months. This means that 2015 will change the country's fortunes, for better or worse.
