Argentina Pins Hopes On Default Overtime To Win Against Creditors

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 |  Includes: ARGT, MELI
by: Rudy Martin

Summary

The Argentine debt restructure issue will not be resolved within U.S. courts or this year.

The lesson for investors is that Frontier markets have limited market accessibility, small company size and low liquidity.

Searching for higher returns leads investors to sometimes overpay for growth.

Despite solid fundamentals for Latam internet - short/avoid overvalued MELI.

Anyone betting on Argentina's ability to run the debt default clock into overtime and achieve a favorable resolution to its debt predicament in 2014 is likely to be disappointed. Renegotiating $15-20 Billion of debt is not something that can be done quickly.

In soccer, a match almost never lasts only 90 minutes. That is because unscheduled stoppage or injury time can be added at the officials' discretion to the end of each half of play.

The court battle between Argentina and 'los fondos buitres', the vulture funds, it is clear there has been significant injury on both sides. With the second-highest inflation rate in the Americas, an economy in recession and still suffering from the massive currency devaluation this year, Argentina did not come to this match in its best condition. It has every incentive to get this debt restructure case behind it as soon as possible.

The game changer would have been the granting of a stay from the judge's last ruling to avoid a selective default. This stay was actually something the funds were more than willing to provide - for a fee.

Normally, a country the size of Argentina's would reach into its foreign reserves of $29 billion, create some new bonds to pay off the old debt and be done with this $1.3 billion nuisance suit. The challenge here, according to the Argentine administration, is that paying 1% of the debt holders could cause 100% of the monolithic settlement for their 2001 default to tumble, crushing the economy in the process.

Whether for political or practical reasons, the only immediate exit strategy that Argentina offered was an immediate participation in the 2010 deal - a 300% profit. This was an offer investor-plaintiffs could afford to refuse and did turn down.

The response from Standard and Poor's was also negative. It lowered Argentina's foreign currency rating to SD, or selective default, for missing a $539 million interest payment on its Discount bonds maturing in 2033, after a 30-day grace period expired.

Now, in fairness to our Latin American neighbors, it is important to point out that the U.S. government has a history of defaulting also. In November of 1814, a few months after the British sacked Washington DC, during the War of 1812, the Treasury was unable to move enough precious metals to service its debt. Again, a second default happened in the spring of 1979 under Jimmy Carter, when the debt ceiling was $800 billion of debt. That $120 million of missed payment, a back office glitch, cost billions of extra interest expense on the entire debt outstanding as interest rates rose.

With investors spooked about potentially rising U.S. interest rates the risk appetite is dwindling.

Practically speaking, last week equity market buyers were hunting for values in Argentine stocks, which actually rose in anticipation of some magical resolution to Argentina's debt problem.

Given that developing, Frontier markets have limited market accessibility, small company size and low liquidity, it would be natural to expect a big discount in these stocks and that's still not the current status especially in Argentina.

Of these short candidate, the easiest one to spot is Internet high-flyer Mercadolibre (NASDAQ:MELI) which historically has been the growth leader and is now severely over-valued based on the Infinancials GPRV snapshot.

The stocks 200 day moving average is $98 and dropping toward the 50 day moving average of $89. With slowing growth, declining operating cashflow it's questionable how much more upside MELI has from here.

In closing, my take on all this is expect more Argentine defiance of U.S. courts and some very predictable damage to Argentina's creditors and investors.

Hey, that's why they call Argentina a developing market.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.