Economy Argentina downgraded to nearly junk status

[PhelipCer]

The powers that control Argentina want to punish her for expressing their collective vote and saying no to austerity and servitude. People voted against Macri due to their terrible financial situation . Unfortunately I believe it will get much worse if Argentina defaults

Bloomberg - Are you a robot?

www.bloomberg.com

 

[Dexter]

You are mixing up two completely unrelated issues.
Most international bond buyers and rate agencies don't know much about Argentine politics. They know the yield of the bond and they know the rating of the bond.
If the government threatens to default on its debts, the price and rating of the bond goes down. That is universal. Where the money went and which corrupt politician took it is irrelevant on that process.
Now, are there legitimate scenarios for a politician to default on a bond? Sure there are. Some debts are unpayable and the social consts of trying to pay for those debts are too high. However, one is fooling himself/herself if they think that they can default without consequence. If you default or threaten to default, no one else will lend you money. That s not an ideological statement, that is a matter of fact.
Where the money went and how politicians used it is not the bond buyer's problem. That is an Argentine internal matter.

 

[MiltonHouses]

Argentine debt is rated because it was to Argentina's advantage. Rating agencies do not rate most debt for free; they charge the borrower to initiate a rating and they charge for ongoing rating service. Debt rating is a time-consuming, elaborate, highly involved process.

Argentina issued dollar denominated, rated debt for three reasons - all of them to Argentina's advantage. First, by issuing dollar debt, Argentina widened the pool of potential buyers significantly, thereby garnering a lower interest rate. Second, by issuing debt in the US, specifically New York State, Argentina garnered a lower interest rate, through buyer confidence that their rights would be honored in a court of law. Third, by getting the debt rated by at least 2 of the three big credit raters, Argentina garnered a lower interest rate.

Notice that all three choices, made by Argentina, were to Argentina's economic advantage: a lower interest rate. Issuance of debt in Argentine pesos, under Argentine law, and unrated, would have gone nowhere. No one would have bought such bonds.

Argentina mostly operates domestically in a fantasy world. Crimes are not punished, lack of initiative is rewarded, workers would rather strike than work. When Argentina issues debt to international investors, with a rating, under US law, it plays in the real world. Mistakes are punished. Dishonesty produces alienation. Unfulfilled promises are expensive.

When Argentina, or any debtor, issues bonds, it signs an indenture. This is a legal contract outlining each party's rights and serves as a promise to pay. Breach of the indenture is just like breaching any other contract. For those who lament this process, I would suggest they reflect on their own personal history and consider a time when someone broke a financial promise to their detriment. It is not fun, it is usually expensive and it often produces considerable emotional angst. Argentina is headed for a debt default, which means a breach of its promise to pay those who lent it money. It is too simplistic to think of counterparties as "Wall Street sharks." The institutions that lent Argentina money represent thousands of people, many of them retirees, retail investors, mom and pops. An Argentine debt default will economically harm many innocent investors who entrusted their money (mostly indirectly) to Argentina. Just as if you lent money to a friend who refuses to pay you back.

Fitch, the agency that downgraded Argentine sovereign debt to the same level as Zambia, is acting anticipatorily. Financial markets are forward looking, they assimilate all available information to create a future outlook. Argentina is a far riskier investment after election results last Sunday. Argentina must pay for its increased risk profile. This is the way of the developed world.

 

[PhelipCer]

Miltom why are the people only responsible for the corruption and blatant mismanegement of the argentinian economy I believe that the politicians who make these decisions without a referendum must also accept responsibility and pay as well . I find it outrageous that these politicians just jump ship and live the high life in Europe and the people are left living like paupers in their home country .

The debt to the imf is a case in point . This money was borrowed without the peoples approval and not used correctly . I believe that most of this debt has been spent propping up the devalued peso . This goes against the imf rules but they very quiet on this issue There has been no accounting presented to the argentinian public on debt taken which is contrary to all decency .
.
These politicians will live in luxury without repercussions but the battered Argentinian populace for 10 years or more will have a very diminished standard of living . It might be legal to downgrade our debt level but imho it should be illegal to destroy all peoples hopes and cause financial terrorism on the majority of the population due to the mismanagement of their economy by inept politicians

 

[MiltonHouses]

Miltom why are the people only responsible for the corruption and blatant mismanegement of the argentinian economy I believe that the politicians who make these decisions without a referendum must also accept responsibility and pay as well . I find it outrageous that these politicians just jump ship and live the high life in Europe and the people are left living like paupers in their home country .

The debt to the imf is a case in point . This money was borrowed without the peoples approval and not used correctly . I believe that most of this debt has been spent propping up the devalued peso . This goes against the imf rules but they very quiet on this issue There has been no accounting presented to the argentinian public on debt taken which is contrary to all decency .
.
These politicians will live in luxury without repercussions but the battered Argentinian populace for 10 years or more will have a very diminished standard of living . It might be legal to downgrade our debt level but imho it should be illegal to destroy all peoples hopes and cause financial terrorism on the majority of the population due to the mismanagement of their economy by inept politicians

I agree with your observation of the political system, Perry. In Argentina's case, it is a hugely difficult situation to make sense of. I argued with a few people on this forum about the bank bailouts in the US. One point that we agreed upon: it was a shame that none of the US big bank CEOs went to jail. Most of them committed acts of egregious immorality. Dick Fuld at Lehman Brothers was the worst. He should have been locked up for life.

The only observation I would make in Argentina's case is that Macri was democratically elected and he pretty much did what he said he would do. He brought in free market reforms, floated the peso, settled with the hedge funds on the defaulted debt and lowered export taxes for agriculture. To the best of my knowledge, he ran on a transparent platform and that's what a majority of Argentine's voted for. Otherwise, I share your frustration that incompetent politicians are rarely held accountable.

 

[earlyretirement]

I agree with your observation of the political system, Perry. In Argentina's case, it is a hugely difficult situation to make sense of. I argued with a few people on this forum about the bank bailouts in the US. One point that we agreed upon: it was a shame that none of the US big bank CEOs went to jail. Most of them committed acts of egregious immorality. Dick Fuld at Lehman Brothers was the worst. He should have been locked up for life.

The only observation I would make in Argentina's case is that Macri was democratically elected and he pretty much did what he said he would do. He brought in free market reforms, floated the peso, settled with the hedge funds on the defaulted debt and lowered export taxes for agriculture. To the best of my knowledge, he ran on a transparent platform and that's what a majority of Argentine's voted for. Otherwise, I share your frustration that incompetent politicians are rarely held accountable.

This is a good post and spot on target. I agree with you about the frustration that no US bank CEO's going to jail. At least Dick Fuld lost almost all of his net worth when Lehman collapsed.

I don't think most intelligent people really expected that Macri would somehow fix all of the severe and unfixable problems in Argentina. NO ONE could do that in many terms in office. Absolutely he made a lot of mistakes. But make NO mistake. Argentina was heading for severe issues no matter which President was in office. That's what I don't think many of the people complaining now don't understand. It's like these people don't really understand Argentina and all the systemic failure there. There is really no long term solution to Argentina's woes other than take advantage of the ups and downs.

 

[FelipeMex]

The powers that control Argentina want to punish her for expressing their collective vote and saying no to austerity and servitude. People voted against Macri due to their terrible financial situation . Unfortunately I believe it will get much worse if Argentina defaults

Bloomberg - Are you a robot?

www.bloomberg.com

Well, who (the majority) voted for the corrupt politicians?

 

[earlyretirement]

Well, who (the majority) voted for the corrupt politicians?

The same people that are re-electing CFK (perhaps one of the most corrupt and politicians that has stolen the most money - by all accounts in the hundreds of millions of dollars).

This is why Argentina isn't "fixable". Everything there is broken and can't really be fixed.