Wednesday 13 December 2017

Business as unusual after Argentina's second default

Last week, the Argentine government defaulted on its sovereign debt. Again. Has the sky fallen in over Buenos Aires, wonders Sarah Marsh

Argentina's President Cristina Fernandez de Kirchner (C) speaks to supporters from a balcony inside the Casa Rosada Presidential Palace in Buenos Aires. Photo: Reuters/Marcus Brindicci
Argentina's President Cristina Fernandez de Kirchner (C) speaks to supporters from a balcony inside the Casa Rosada Presidential Palace in Buenos Aires. Photo: Reuters/Marcus Brindicci

Argentina may have defaulted on its debt for the second time in 12 years last week, but the packed elegant cafes in Buenos Aires show little sign of distress - and shoppers rather than protesters fill the streets.

Jose Bini, a 27-year-old Argentine entrepreneur, shrugged off the news of the default with resigned laughter, saying he was used to economic crises. At least this was not as bad as the 2001/02 crash in Latin America's third biggest economy, he said.

"We are used to living like riding a roller coaster," said Bini, who will not change his plans to expand his microbrewery because of the default. "I have lived through two defaults, hyperinflation, an economic crash, stagflation - and I'm only 27."

Argentina, which is already mired in recession, failed on Wednesday to strike a deal with "holdout" hedge funds suing the nation for full payment of their defaulted bonds in time for a midnight deadline.

But unlike the last default - when the state went bankrupt, triggering bloody protests and plunging millions into poverty - this time around Argentina is solvent.

It simply cannot get coupon payments to bondholders due to a US court ruling, meaning it is in "technical default".

News of the default prompted Argentine stocks and bonds to reverse recent gains on Thursday, but did not cause a rout. The peso fell 2.52pc and currency traders on the streets of Buenos Aires said there had been no rush to buy safe-haven dollars.

The streets of Buenos Aires were calm on Thursday and many said they did not understand how the default might affect them.

"It creates a lot of uncertainty but I don't know how it will impact me," said Silvina Ferreyra (33), a saleswoman for an airline, who said she followed the news but did not understand it all.

"I have a secure job, but I don't know what will happen. It's difficult to invest in your life, for example buy a house, with so much uncertainty. But what can you do? Life goes on."

The increased uncertainty will weigh on already weak consumption, said 55-year-old shopkeeper Liliana Suaya. Sales already fell 40pc this year due to inflation that economists forecast will reach 30pc to 40pc by the end of the year.

"People will likely be more worried about losing their jobs and inflation accelerating," said Suaya, who has sold clothes in the working-class district of Once for more than two decades. "Lots of shops around here have been closing recently."

Many buildings standing empty in Once are taken over by squatters and Suaya is worried about rising crime. But Suaya said she was used to economic ups and downs and like many, had saved during Argentina's stellar recovery in the 2000s. Sales rose just as fast then as they are falling now.

How much pain a default inflicts on Argentines will depend on how swiftly the country can extricate itself.

A prolonged crisis will raise borrowing costs, accelerate one of the world's highest inflation rates and weaken the peso.

With the South American country still banned from international credit markets, the Buenos Aires government will most likely further tighten import and capital controls in order to protect dwindling foreign reserves.

"It seems to be business as usual right now," said entrepreneur Bini, who says many of his friends had already left the country to look for better prospects. "Argentines will get to feel the default, but not just yet."

Some Argentines said they were afraid the default would push them from a precarious situation into outright poverty. The government estimates the poverty rate at 5pc, but private analysts say it is at least five times higher.

"I'm worried more people will go hungry in 2015," said Daiana Valdez (19), adding that many people in her provincial home town lived in shanty houses and did not have enough to eat.

But many Argentines' worries, especially among the middle classes, were tempered by optimism that either the government or third parties would reach a deal eventually with the holdouts.

"The impression is that there will be a solution, so people are not taking it all too seriously," said Osvaldo Cornide, head of the chamber of mid-sized companies.

So far, the debt crisis does not seem to be heightening discontent with the government. Instead, many approve of its stand-off with the funds it calls "vultures" for buying Argentine debt at a discount and demanding payback in full.

'Argentina does not cave into extortion' and 'Argentina rejects vultures' pressure' read the headlines of pro-government newspapers on Thursday. Even anti-government dailies did not place the blame for the default on President Cristina Fernandez.

And as long as the extra economic impact of default remains intangible for most, this looks set to remain the case.

Andrea Yohai, a 59-year-old massage therapist, said she approved of the way the government had handled the crisis. "They are just defending Argentina's interest."

© Reuters

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