BUENOS AIRES, Argentina
Argentina’s government has sought to downplay concerns of the economic impact of a potential debt default at the end of the month, a fate that appears to be becoming more likely.
Cabinet Chief Jorge Capitanich's comments on Wednesday came as the government faces a July 30 deadline to make the payment or negotiate a solution, before Latin America’s third-largest economy enters its second default in 13 years.
“Argentina continues, and it will continue,” Capitanich said in a televised press conference.
He spoke a day after U.S. federal judge Thomas Griesa declined to suspend his order for the country to pay back creditors who won a lawsuit in his court to collect full repayment on bonds left over from a $100 billion default in 2001.
If no solution is found and a default takes place, Capitanich said: “Life will go on.”
“We have coexisted with this problem and judicial actions (since 2001)," he said, attributing Argentina's apparent stoicism to the government’s economic stimulus programs.
- 'Worst alternative'
Based on Griesa’s order, the government cannot complete a $539 million payment to the 92.4 percent of its bondholders who accepted 30 cents on the dollar in restructures of the defaulted bonds in 2005 and 2010, without also paying the plaintiff creditors.
The decision is based on an "equal treatment of creditors" clause in the defaulted bonds.
Argentina’s appeals against the decision have failed and it has little recourse left but to default.
Griesa told the government and plaintiff creditors on Tuesday to hold round-the-clock talks to find a solution and avert a new default, which the judge described as the worst alternative because “real people” will be hurt in Argentina.
The talks were due to start Wednesday in New York.
Capitanich added that foreign investment is due to flow in for energy, mining and transport projects and a planned tender for fourth-generation mobile telephone networks.
- Renewed pressure
Economists, however, have warned that a default could slow investment and spark a run on the peso, leading to a decline in foreign currency reserves that this year hit a seven-year low of $29 billion.
The country relies on its reserves for paying the national debt and covering imports as the 2001 default prevented it accessing international financial markets.
A new default would be “another headwind that will prevent a quick recovery” from a recession that began this year, said David Rees, an economist at the Capital Economics in London, in a note to clients.
He said that a default will probably push up interest rates, deterring investment and slowing activity in the private sector.
He added another consequence would be a rise in capital outflows that would “exacerbate a shortage of hard currency and put renewed pressure on foreign exchange reserves and the peso”.
However, Rees said the good news is that a new default will not probably create “the kind of meltdown that followed the initial default in 2001, when gross domestic product contracted by almost 11 percent”.
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