WASHINGTON, March 14 (UPI) -- Nestor Kirchner didn't mean to let slip -- or maybe he did. No sooner had he conferred with Economy Minister Roberto Lavagna about Lavagna's talks with the International Monetary Fund, focusing on Argentina's controversial discriminatory debt swap, then the president went on national television to complain of "extortion."
What did the IMF, which was quiet all week about Argentina's successful robbery of the global stagecoach, say to deserve that? "We are not aware of any IMF comments," a spokesmen in the Argentine Embassy explained, stiffly.
Silent run-in
And therein lay the problem. Kirchner had been hoping not for silence, but for the Fund to admit the obvious, and explicitly endorse Argentina's success at getting nearly 80 percent of its creditors to accept dimes on the dollar for their loans. (More than 20 percent of investors, of course, did not accept).
But as Mr. Kirchner is learning from the country's threatened boycott of Shell oil, you can't push a string. The IMF, according to aides close to managing director Rodrigo de Rato, may feel there isn't much it can do at this point to reverse Argentina's fait accompli. But that doesn't mean it feels obliged to pat Mr. Kirchner on the back and congratulate him.
(Side memo to Mr. Rato: 1. Start filing amicus briefs in the dozens of global court cases. 2. Issue a joint statement with John Snow or the G8 saying the Fund does not accept the debt swap. 3. Suspend even "technical talks" until Argentina comes to terms with all its creditors in a non-discriminatory offering.)
Sometimes, as Mr. Rato and his capable advisor Tom Dawson know, nothing can be a pretty powerful thing to say. Or, as the mayor of "Animal House" put it when Dean Wermer questioned charges for the Faber College homecoming parade, "you mention extortion again, and I'll have your legs broken."
High stakes for Rato
The next weeks are critical, not just for Argentina, but for Mr. Rato and the IMF itself; indeed, for global markets.
Mr. Kirchner has bluffed and bullied his way to what amounts to the largest international confiscation of the year, topping even Vladimir Putin's regulatory nationalization of Yukos.
Or has he? Unlike the Yukos shareholders, Argentine bondholders have automatic jurisdiction, and a good case in court.
Argentina hasn't won this high-stakes game yet. We aren't even to the first flop. It might only take a very light breeze, either from Mr. Rato or U.S. Treasury Secretary John Snow, to blow over the house of cards.
For the Fund, developing some kind of leverage against the defiant Argentines is critical. Nestor Kirchner is Mr. Rato's Saddam Hussein. The world's debt collector can't afford to have a major client be seen getting off without a broken thumb or two. This, as Rocky Balboa's boss Gazzo put it, would be "bad for business."
Slapping Kirchner around probably would not be as difficult as Kirchner, or reluctant officials at the U.S. Treasury Department (keen to rescue Iraq from a very different kind of default), seem to think. This week, the IMF said nothing, Mr. Kirchner blustered, and Argentine stocks plunged nearly 10 percent. Imagine what modest proactive steps might achieve.
Bottom Line
For investors, the question is not, what should the IMF do, but what will it do? (Or the courts, who could bail out the Hamlet-like Rato and Snow by ruling on behalf of thousands of aggrieved bondholders without their help.)
My own guess is that the Fund's institutional imperatives cannot allow the Argentine deal to stand. Turkey, to mention just one example, is supposed to be deep into rescheduling talks -- but has been blandly unconcerned despite the Fund's growing impatience.
Hence Argentina remains a good short. Of course, "Bottom Line" regarded it as a good short with the Merval at 1300. But we stuck with our guns and increased the position this week in the high 1500s -- just as Messrs. Kirchner and Lavagna were pulling out the noisemakers, popping corks, and thumbing their noses at the IMF.
Thus we're still short Argentina, but with an added warning to global investors: If this view of likely events proves wrong, and Argentina gets away with the default, it will be time to review -- not necessarily dump, but review -- all emerging market exposure.
There is no shortage of countries that would like to pull of what Mr. Kirchner has pulled off -- if he's able to pull it off.
Argentina's debt restructuring has recompensed its lenders about 30 cents on the dollar.
This is approximately what a lot of other emerging market securities will be worth, unless Mr. Rato or Mr. Snow assemble a coalition of the willing. Which is why, in the end, they're likely to do so.
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(Gregory Fossedal is an advisor to international investors on global markets and ideopolitical risk, and a research fellow at the Alexis de Tocqueville Institution. His clients may hold long and short positions in many of the investment securities and opportunities mentioned in his reports. Investors should perform their own due diligence and consult their own professional advisor before buying or selling any securities. Mr. Fossedal's opinions are entirely his own, and are not necessarily those of his clients, UPI, or AdTI. Furthermore, they are subject to change without notice.)
