A failure by Argentina to avoid a second default in 13 years will deepen the recession, fuel inflation and prompt a selloff in the peso, according to Claudio Loser, a former International Monetary Fund director.
Demand for dollars will surge as Argentines flee to a safer currency, Loser, the head of research firm Centennial Group Latin America, said today on a conference call. The slump in South America’s second-biggest economy, which contracted 0.2 percent in the first quarter, will extend, he said.
Argentina has until July 30 to settle a lawsuit with disgruntled bondholders from the nation’s last default in 2001 before the dispute triggers a new default on restructured debt. The creditors, led by hedge fund Elliott Management Corp., won a court order that forces Argentina to pay defaulted bonds in full when it makes payments on performing bonds.
“People will be nervous, people will try to take more money out,” said Loser, the IMF’s Western Hemisphere director between 1994 and 2002. “The people who will suffer the most are the people that are the more vulnerable, the poor.”
A U.S. judge last month blocked a $539 million bond payment because the nation hadn’t complied with his orders. While Argentina has since met twice with a court-appointed mediator in New York, no face-to-face meeting with the defaulted-debt creditors has taken place. Elliott and Aurelius Capital Management LP say Argentina is refusing to negotiate, while government officials insist that U.S. courts must suspend the effect of the ruling before talks can start.
President Cristina Fernandez de Kirchner, whose second term ends in 2015, dismissed concern earlier this week that the nation is risking default by not reaching a deal.
“Only countries that stop paying their debt fall into default,” she said at a July 16 summit in Fortaleza, Brazil. “Argentina will keep paying its debt and meeting its obligations.”
Settling with the holdouts, who rejected the terms of two debt swaps in 2005 and 2010 that imposed losses of 70 percent, will allow the country to save as much as $6 billion per year over the next decade in reduced borrowing costs abroad, Loser said.
Argentines would also stop moving funds offshore and foreign companies will be more willing to reinvest their profits in the country, he said. Foreign reserves, which are hovering close to an eight-year low, will stabilize and could increase as much as $10 billion over the next year, he said.
“I’m still hoping that they’re playing a game of poker,” Loser said. “Some people may think that when there’s a new government by the end of next year things will move, but that will take time. The damage of not finding a solution now will continue through certainly the early part of any new government that comes in.”