It is time to cry for Argentina. It has not kept its promise, and now things are in disarray with the peso. At the same time however there may be a way out through the bitcoin.
The Beginning of the Problems
It is not the first time that Argentina has had problems with its payments. It also happened in 2001 and on six other occasions since independence from Spain in 1816. The economic problems were in consequence to the political instability of the 70s and 80s in which inflation hit as high as 325% a year in one period.
The problem persisted until 1991 when then President Carlos Menem dollarized the economy. Under his administration, the Argentine Congress passed the Convertibility Law, which pegged the Argentine Peso at parity to the US dollar.
In the early years, the measures effected by the Argentine Currency Board controlled inflation which tumbled from 3,000% in 1989 to 3.4% in 1994, and economic growth occurred as a result of the high prices of primary products in the world market. Then in 1995, Mexico devalued its peso and what became known as the Mexican crisis, or the Tequila effect rippled the Argentine economy after 1995. As a result of this crisis public debt increased sharply, as the government, barred from printing money, floated debt instruments in the local capital markets.
Since domestic savings were low, most of the debt ended up being in foreign currency. As a result of the larger amounts of debt needing to be serviced by Argentina, the country required more dollars to service its international debts, creating a strain on the country’s current account.
Events happening elsewhere such as the Asian and Russian financial crises made investors a lot more wary of where they would be putting their money, but perhaps the most critical event that tipped over the Argentine economy was the decision by neighbor, and largest trading partner Brazil to devalue its own real in 1999. The effect of a strong, dollar-pegged Argentine peso and a weak Brazilian real backed by strong Brazilian manufacturing and financial markets was to render Argentine goods uncompetitive in international trade, leading to reduced incomes and a bigger current account deficit in Buenos Aires.
Push came to shove in December 2001 when Finance minister, Domingo Cavallo restricted bank withdrawals to a maximum of 1,000 pesos/dollars per month until March 2002. This move was so unpopular that it forced the resignation of President de la Rua and the finance minister himself. For the next two weeks Argentina saw the swearing in of another five presidents all making an attempt at fire-fighting on the economy in what became known as the Corralito.
Things were back on the mend for most of the first decade of the 21st century as a result of high commodity prices and successful negotiations with its creditors.
Causes of the 2014 Default
Due to Argentina’s inability to pay its debts on six previous instances, Argentina could no longer issue a creditworthy sovereign bond. For international investors to accept Argentine debt, the country had to find a different way of issuing credible bonds. Argentina decided to issue its bonds under the jurisdiction of the state of New York. This meant that the country would accept the decisions of the state of New York in a dispute with its creditors.
The bonds also had other conditions. The first condition held that Argentina had to treat all creditors in the same way when it came to payment. This is called the paripassu clause. The second condition was that there would be no collective action clause.
The collective action clause states that in the event of debt rescheduling, if a certain number of creditors accept the new debt repayment plan, then the creditors who refuse to accept the new terms will automatically be compelled to accept the new plan. What this means in Argentina’s case is that the creditors who refuse to accept the new terms would receive their money back under paripassu.
Argentina decided to restructure its bond payments. The majority of its creditors accepted the new terms except for a few held out. Without a collective action clause baked into the agreements with its creditors Argentina was badly exposed.
President Cristina de Kirchner’s government decided not to pay those who refused the new terms. Under the contract that Argentina had offered its creditors they were entitled to sue the Argentine government in New York, which they did before Judge Thomas Griesa in a federal trial court in New York. Argentina appealed all the way to the US Supreme Court which refused to hear Argentina’s petitions. As a result Argentina was therefore required to pay its debt on or before July 30th 2014, failure to which it would be in default. Argentina chose to default.
The Bitcoin Opportunity
Argentina’s problems are mostly dollar-related, and the New York ruling only emphasizes that perception. The effect of the latest Argentine default will only compound the peso’s problems which is expected to lose its value.
Adoption of the bitcoin could help Argentina’s merchants skirt around the dollar problems which has resulted in a huge 50% gulf between official and what are called “blue” exchange rates. Bitcoin thus offers a more stable store of value as the country holds its collective breath on debt negotiations taking place in New York.
Already payment processors in Buenos Aires are alive to the possibilities presented by Bitcoin. Bitpagos for example targets establishments in which international visitors have to grapple with high fees for credit card transactions.
Bitcoin is beginning to demonstrate more stability vis-à-vis the dollar. In the week ending August 1, it has hovered at beneath the $600-mark. The Argentine government could scale up the use of bitcoin in payment thus enabling it save up on precious dollar reserves in the economy.
Already Argentina leads Latin America in bitcoin adoption, and Señora de Kirchner will find bitcoin adoption an easier task to perform. Thus the country that gave the world Maradona, Evita and Che Guevara will find the going less Messier with its international lenders (pun fully intended).
Written by Bitmaina for CEX.IO