​A Presidential stance against Moral Hazard

ARGENTINA - In Brief 16 Jun 2014 by Esteban Fernandez Medrano

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As might have been expected, at least from a Game Theory point of view, tonight’s presidential speech was not very precise regarding the future steps the government is going to take, after earlier today’s confirmation that the US Supreme Court was not going to take Argentina’s appeal. In her speech, President Cristina Fernández de Kirchner went in length to explain the source of Argentina’s debt and the economic rationale that drives Holdouts to reject previous debt swaps. While her historical revision was somewhat ideologically biased, the explanation of the Holdouts so called “business mode”, on the contrary, was quite precise. That is the fact that Holdouts exploit the lack of Collective Action Clauses in sovereign debt issuances and, thanks to such legal loophole, focus their efforts in obtaining a judicial bailout to their distressed assets investments. And that the effectives of such legal bailout relies in the judges ability to prohibit the sovereign to honor its restructures debt, effectively blackmailing de government and restructures debt holders. But despite her lack of precision regarding the future, she nevertheless gave two important messages. 1) Argentina cannot honor the obligations that emerge from Judge Griesas ruling: The arguments used were quite in line with our speculation published earlier today and in previous reports. Payment obligations to Holdouts go well beyond the almost USD 1.5bn of defaulted debt, which are currently discussed. But reach close to USD 15bn (according to government calculations) when adding the remaining holdouts with full face value and PDIs. More importantly such payment, before December 31s , might open up the possibilit...