NEW YORK, March 21 (UPI) -- On March 14, Bottom Line encouraged the International Monetary Fund to at least express some reservations about Argentina's illegal bond swap. "Issue a joint statement" with the U.S. Treasury, we suggested, "saying the Fund does not accept the debt swap." (See "Argentina's coup d'ebtat.")
On March 15, from China, IMF Managing Director Rodrigo de Rato issued a statement warning: The IMF considers it indispensable that rules for local and international investment be clear and respectful.'' I.e., the IMF, after months of silence and even slight encouragement of coup leader Nestor Kirchner, does not necessarily accept the debt swap.
Well, that was fast. In short, you can read it here, courtesy of United Press International, today, or read it from the mouths of financial policy-makers on your Bloomberg terminal a day or two later. Argentina's equities market has, as well, come back to earth in the last 10 trading days, declining about 15 percent in dollar terms.
As always, however, the question is, "what next?" Here, despite a recent mini-rally in Argentina's Merval on Friday, we're inclined to hold those shorts for more.
STAND-BY AND STAND-OFF
The dog that hasn't barked yet is the U.S. Treasury Department. "What should we say now?," a clueless assistant secretary apparently asked more than one major skeptic who holds Argentine debt, but has not accepted the country's 30-cents-on-the-dollar offer. "Why didn't you ask me that three months ago?," one investor complained.
Over the last year, the major reason for Treasury's quiescence was the White House -- specifically then-National Security Advisor Condoleeza Rice. Rice had no particular axe to grind as far as Argentina went. She was understandably obsessed, though, with getting a settlement on Iraq's debt -- another default, but for a much more venial reason than Argentina's broad-daylight train robbery.
"Wait and see," Rice reportedly responded to a Treasury memo last September asking for guidance on the emerging Argentine swap.
Now, Rice is at State; Iraq's debt questions are settled; and Mr. Bush is re-elected. Perhaps most hopeful, the omnicompetent Elliot Abrams, who understands Latin America well, has taken over as (in effect) the NSC's point man for monitoring the world's democracy dominoes.
If no one else high in the Bush Administration understands the threat of an Argentine spillover into the rest of Latin America's democratic-capitalist transition, Abrams (cc: Paul Wolfowitz) should.
Consider: In recent months, such countries as Bolivia and Venezuela, emboldened by Argentina's successful aggression against the debt appeasers, have begun to act aggressively against private companies, global trade agreements, and sovereign debt obligations. Brazil's president, Luis Inacio Lula da Sliva, has come under pressure from the hardcore leftist forces that elected him, and could easily join or head a coalition of Latins combining to undermine debtor obligations, or frustrate U.S. objectives globally, or both.
This weekend, investor par excellence Jimmy Rogers even suggested that the U.S. may soon invade Venezuela. Rogers is a serious guy, and hardly a military-interventionist hawk in policy terms. For him to raise this prospect is an indication of the serious damage Argentina can yet do to U.S. and global investor interests.
The broader threat, of course, is that collapsing values for all emerging market, developing-democracy debt and equity prices will strangle the Bush-Wolfowitz-Abrams vision in its cradle.
Argentina's bondholders are receiving less than 35 cents on the dollar. This is approximately what could happen to a number of emerging markets if the Argentine coup is allowed to stand. The more so for small, weak, fledgling, high-risk states, such as Palestine, Jordan, Lebanon, Iraq, Afghanistan, and others.
Bottom Line is more interested in what will happen than what should. We're guessing that Treasury will break its silence in the coming days. Still, the world may be just at the start of a process that will be even more agonizing than the Yukos affair was for shareholders in Russia, for at least three reasons.
-- 1. The Argentine deal itself appears to be a cesspool of conflicts of interest, undisclosed swaps, kickbacks, and backdoor favoritism in parking orders. If the details ever come out, Argentinagate might dwarf the U.N. oil for food scandal. In dollar terms, UN graft in Iraq is to Argentina's $80 billion taking what a sandcastle is to the tsunami.
-- 2. It's hard to see how it gets settled promptly. Seventy-six percent acceptance sounds high, but is one of the lowest rates in history. It's lower than the 95 percent or so needed to crush the remaining 4-5 percent who hold out, however unfairly. Yet it's higher than the 30-50 percent that would have made the deal an obvious flop.
The result, as investor Hans Humes predicted, is in some ways the worst of all worlds. (Humes is a 4-star investor who represents Argentine bondholders.)
Those who declined the deal must now dig in all the harder in court, and in backdoor quasi-negotiations with and through the IMF and Treasury. Argentina's government, buoyed by the acceptance by many, and the feckless response of the IMF and Treasury up until recent days, has no reason to be humble, and no inclination to do so. The New York institutions that got their cut from the deal don't want to see it undermined; those that got ripped off, though, don't want to relent, and have nothing to gain from it.
In short, it is a Hobbesian war of all against all.
The IMF and Treasury stand unable to fight the deal or accept it, like Abe Lincoln's proverbial oxe caught straddling on a fence, unable to move in either direction.
This, too, shall pass -- eventually.
In the meantime, Bottom Line expects months of agony, which is why we remain short Argentine stocks and a number of other Latin markets. (Mexico and Brazil, for instance, have declined substantially in sympathy with Argentina. The whole Latin economy looks more dubious, and prospects for a unified hemisphere of democracy and trade, suddenly weak.)
(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.)