Latin Finance - September/October 2014 - 16

©REUTERS

RE-ENGAGING: Rafael Correa, Ecuador's
president, led the country back to the capital
markets after its 2008 default

about its own exposures - especially given political instability in
Venezuela, where it has some $50 billion invested - he adds.
"There's a different kind of relationship. China is a significant
player, they are investing in certain areas and they're still a major
trading partner - the principal trading partner for a number of
countries. They're a permanent part of this equation," he says.
"But this phase of everything going smoothly, of the Chinese
being happy and of the Latin American partners being happy, may
have come to an end. Now there's a more complicated relationship."
That changing dynamic has forced governments that were
previously content to rely on cheap loans and trade with China to
look elsewhere, prompting an apparent rethinking of their attitudes
toward global financial markets.
To some extent, Argentina appeared to fit this mold. While the
government had taken steps towards ultimately engaging with
global financial markets - through deals with Repsol and the Paris
Club - the consensus inside the country is that this did not represent
an ideological shift on the part of the government.
Rather, the moves reflected a realization that hard currency was
running low. Without a fresh flow of dollars, the country would
struggle to service its debt and continue with the same level of
government spending - especially when entering an election year.
"The government's approach has essentially been one of financial
opportunism, rather than a change to market-friendly policies,"
Martín Redrado, a former Argentine central bank governor, tells
LatinFinance.
He points out that Argentina's foreign exchange reserves had
dwindled in recent years. Central bank data shows reserves falling
from $46.23 billion at the start of 2012, to $30.6 billion two years
later, and $28.9 billion by mid-August this year.
"There was a realization that to keep the wheels rolling, they
needed dollars," Redrado says.
Argentine authorities set out to address the hurdles in the way of
gaining fresh access to hard currency: its Paris Club debt, its Repsol
obligations, the exchange rate and the long-standing legal fight with
holdout creditors.
Sources close to the government tell LatinFinance that the
Argentine authorities had considered in earnest striking a deal
with holdout creditors. But in the days and weeks after the US

16 L ATINFINA NCE.COM - September/October 2014

Supreme Court upheld a New York court decision to bar payments
to restructured bondholders before holdouts were paid, it was hit
with competing pieces of advice - and President Fernández changed
course. "The inexperience in such matters at the highest levels was
very apparent," says a source close to the discussions.
Ultimately, political logic won out over economic considerations
as polls showed a surge in popular support for Fernández taking a
hard line with holdout creditors.
"What matters the most to the government is what matters
most to public opinion," says Daniel Marx, a former Argentine
finance secretary and executive director at Quantum Finanzas, a
consultancy.
Argentina's bid to swap its New York-law bonds into paper subject
to domestic regulations further cut hopes that the sovereign would
strike a deal with holdouts before next year's elections. The proposal
was ruled illegal by the New York court.
"It's a tactical game. It shows that this president is not willing to
give one cent to the holdouts," says Redrado.
The government argues its hands were tied and it was unable to
offer holdouts anything more than it gave other creditors. Still, the
hardline stance toward negotiations may bring some short-term
political benefit. Yet the longer-term consequences are likely to be
vastly more complicated: economists predict the default will pile on
inflationary pressures while accelerating the peso's slide and further
pulling down growth.
MARTÍN REDRADO
FORMER CENTRAL BANK GOVERNOR, ARGENTINA

"THERE WAS A REALIZATION THAT
TO KEEP THE WHEELS ROLLING,
THEY NEEDED DOLLARS"
The peso slumped after the default, and is down 22% this year.
Puente, a local investment bank, says that international reserves will
drop from $28.9 billion now to $23 billion by year-end and $15 billion
in 2015, as capital flight gathers pace.
Redrado predicts that the economy will contract by 2.5% of GDP
in 2014. "If they can adjust the exchange rate gradually, then we'll
have a contraction of 1% next year," he says. Increased dollar inflows
from resolving the default would alleviate Argentina's debt burden,
which is set to double next year as $5.9 billion come due on its Boden
2015 bonds.
Pragmatic rewards
In contrast, governments that are steering their economies away
from blind populism and toward deeper engagement with global
capital have plenty to show for their efforts.
Paraguay and Ecuador perhaps illustrate this most clearly. Ratings
agencies have upgraded Paraguay's government debt twice in 2014.
Its bond market return in 2013 not only raised capital for investment,
but opened the way for one of the country's banks, Banco Regional,
to tap the market in January this year.
Ecuador, meanwhile, was able to raise $2 billion from
international investors at a 7.95% interest rate in mid-June. The
deal attracted some $5 billion in orders. Observers attributed asset
managers' appetite for the deal to President Rafael Correa's efforts to
engage with international markets, including trying to cut deals with
bond holders left over from the 2008 default.
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