This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.theguardian.com/commentisfree/2014/jul/30/argentina-economy-defaulting-debt-hedge-fund

The article has changed 2 times. There is an RSS feed of changes available.

Version 0 Version 1
It's the end of Argentina as we know it, and the world economy will be just fine It's the end of Argentina as we know it, and the world economy will be just fine
(about 11 hours later)
Every once in a while you get a crazy financial story that makes you wonder how smart the people in charge really are. Argentina’s recent flirting with economic default is proof that the average consumer, managing a few thousands, could probably do a better job than politicians with billions at their disposal.Every once in a while you get a crazy financial story that makes you wonder how smart the people in charge really are. Argentina’s recent flirting with economic default is proof that the average consumer, managing a few thousands, could probably do a better job than politicians with billions at their disposal.
If you read the papers, you would believe that the land of tango, gauchos, Malbec and great steaks is on the verge of self-destruction: “Argentina dances with default”, groused a Wall Street Journal headline. “Argentina nears cliff in risky debt game”, chided the Financial Times.If you read the papers, you would believe that the land of tango, gauchos, Malbec and great steaks is on the verge of self-destruction: “Argentina dances with default”, groused a Wall Street Journal headline. “Argentina nears cliff in risky debt game”, chided the Financial Times.
Sounds dire, doesn’t it?Sounds dire, doesn’t it?
It is possible – but very unlikely, despite ongoing talks – that Argentina may willfully destroy its own economy in an ill-fated political attempt to look tough on foreigners, particularly in the form of mostly American hedge-fund managers. You don’t have to watch old episodes of Dallas to know that “rich Americans” is shorthand for “evil”. That stereotype has helped Argentina. In a silly form of financial rebellion, the nation refuses to pay the hedge funds $1.5bn in interest it owes on money it borrowed from them, way back in 2001.It is possible – but very unlikely, despite ongoing talks – that Argentina may willfully destroy its own economy in an ill-fated political attempt to look tough on foreigners, particularly in the form of mostly American hedge-fund managers. You don’t have to watch old episodes of Dallas to know that “rich Americans” is shorthand for “evil”. That stereotype has helped Argentina. In a silly form of financial rebellion, the nation refuses to pay the hedge funds $1.5bn in interest it owes on money it borrowed from them, way back in 2001.
The entire point of Argentina’s threat is to create a panic, to telegraph the country’s own power. It shouldn’t. Default isn’t a bad word, and the stubborn refusal by the Argentines to pay up is empty drama that only ends up proving the country’s own weakness.The entire point of Argentina’s threat is to create a panic, to telegraph the country’s own power. It shouldn’t. Default isn’t a bad word, and the stubborn refusal by the Argentines to pay up is empty drama that only ends up proving the country’s own weakness.
The US tried the same technique three times when a team of Tea Party Republicans threatened to pitch America into default. The Americans felt no financial bite from that ill-advised drama – except that the government looked unintelligent and ill-managed – and the Argentines will feel the same embarrassment now.The US tried the same technique three times when a team of Tea Party Republicans threatened to pitch America into default. The Americans felt no financial bite from that ill-advised drama – except that the government looked unintelligent and ill-managed – and the Argentines will feel the same embarrassment now.
Absolutely nothing is riding on an Argentina’s default. The entire conflict is composed of absurdities.Absolutely nothing is riding on an Argentina’s default. The entire conflict is composed of absurdities.
Here’s one: Argentina’s president, Cristina Kirchner, maintains that Argentina can’t afford to pay the hedge funds. But it pays for the rest of us to be skeptical of that claim: if Argentina can pay some of its bondholders, it can pay all of them. The country owes the holdouts roughly only $1.5bn, a fraction of the $23bn it will pay its other bondholders in a single payment.Here’s one: Argentina’s president, Cristina Kirchner, maintains that Argentina can’t afford to pay the hedge funds. But it pays for the rest of us to be skeptical of that claim: if Argentina can pay some of its bondholders, it can pay all of them. The country owes the holdouts roughly only $1.5bn, a fraction of the $23bn it will pay its other bondholders in a single payment.
Here’s another: Argentina’s fight with hedge funds sets no precedents for any other countries. The US will feel no impact, beyond a few investors losing some completely manageable amounts of money on their own. Argentina’s mulishness centers around a relatively paltry set of 13-year-old, $1.5bn bonds that were badly negotiated and haven’t been imitated by any other country since.Here’s another: Argentina’s fight with hedge funds sets no precedents for any other countries. The US will feel no impact, beyond a few investors losing some completely manageable amounts of money on their own. Argentina’s mulishness centers around a relatively paltry set of 13-year-old, $1.5bn bonds that were badly negotiated and haven’t been imitated by any other country since.
And another insanity: Argentina is already unwelcome in the debt markets – avoiding your creditors will do that – so a default wouldn’t make it any worse. Argentina has been so financially isolated for so long that it has nearly no global weight to throw around.And another insanity: Argentina is already unwelcome in the debt markets – avoiding your creditors will do that – so a default wouldn’t make it any worse. Argentina has been so financially isolated for so long that it has nearly no global weight to throw around.
Why would a country go to these lengths just to prove a point? It comes down to politics, and it illuminates how silly high finance can get when there are also votes and political power at stake.Why would a country go to these lengths just to prove a point? It comes down to politics, and it illuminates how silly high finance can get when there are also votes and political power at stake.
Here’s Argentina’s conflict. It’s not complicated. The country borrowed a ton of money, $132bn. Then it had a financial crisis in 2001 and decided it couldn’t pay the interest. Argentina asked bondholders to help it out by trading in their bonds for cheaper ones, which would pay only 30 cents on the dollar. It’s better than zero, so the holders traded in 93% of the old bonds.Here’s Argentina’s conflict. It’s not complicated. The country borrowed a ton of money, $132bn. Then it had a financial crisis in 2001 and decided it couldn’t pay the interest. Argentina asked bondholders to help it out by trading in their bonds for cheaper ones, which would pay only 30 cents on the dollar. It’s better than zero, so the holders traded in 93% of the old bonds.
A group of hedge-fund holdouts, led by Wall Street billionaire Paul Singer, wanted no part of this. They still wanted Argentina to pay the original interest, so they went to a US court. After 13 years, a US judge ruled last month that Argentina lost and has to pay up by Wednesday. Still, Argentina still refuses to pay.A group of hedge-fund holdouts, led by Wall Street billionaire Paul Singer, wanted no part of this. They still wanted Argentina to pay the original interest, so they went to a US court. After 13 years, a US judge ruled last month that Argentina lost and has to pay up by Wednesday. Still, Argentina still refuses to pay.
How will it turn out? This is the first time something quite this stupid is happening, so we’ll have to keep watching. Argentina has pushed its deadline to the very brink, and then some. What is true, however, is that this is the kind of financial irresponsibility you can only indulge in if you have a lot of money. As anyone who has written a check to a terrible landlord or cold-hearted credit-card company knows, disliking someone is not a good reason not to pay what you owe. Any American who has feared foreclosure can enjoy a bitter laugh: if you didn’t pay your mortgage or credit cards for 13 years, you would be on the street. Argentina just gets to throw a tantrum. How will it turn out? This is the first time something quite this stupid is happening, so we’ll have to keep watching. Argentina has pushed its deadline to the very brink, and then some. (Update: on Wednesday afternoon, Standard & Poor’s had judged that Argentina defaulted on its debt. Talks will continue.) What is true, however, is that this is the kind of financial irresponsibility you can only indulge in if you have a lot of money. As anyone who has written a check to a terrible landlord or cold-hearted credit-card company knows, disliking someone is not a good reason not to pay what you owe. Any American who has feared foreclosure can enjoy a bitter laugh: if you didn’t pay your mortgage or credit cards for 13 years, you would be on the street. Argentina just gets to throw a tantrum.
Somehow the goal of financial health gets lost in the infinitely stupid ego-measuring that passes for sophisticated financial negotiations these days. The “nuclear option” of destroying an economy is increasingly becoming a way for politicians to look tough. Unfortunately, it just looks irresponsible. And it’s certainly not the end of the world.Somehow the goal of financial health gets lost in the infinitely stupid ego-measuring that passes for sophisticated financial negotiations these days. The “nuclear option” of destroying an economy is increasingly becoming a way for politicians to look tough. Unfortunately, it just looks irresponsible. And it’s certainly not the end of the world.