With just hours to go before Argentina has to show its last cards in a billion-dollar debt showdown in the U.S. courts, President Cristina Fernandez seems to be keeping up her "we're going for more" motto. Her government is reportedly preparing a response that analysts say could lead the country into another catastrophic default.
Argentina has until midnight Friday to propose how it would satisfy a $1.4 billion judgment won by plaintiffs who have insisted for a decade on getting full payment in cash, plus interest and penalties, on sovereign debt that the country hasn't paid since its world-record default in 2002.
Government officials weren't talking in public about the plan this week, but they have repeatedly said that the plaintiffs it considers "vulture funds" should get no better than what 92 percent of other investors in Argentina accepted in 2005 and 2010 in exchange for their defaulted bonds: a package of new bonds that were initially worth less than 30 cents on the dollar.
The exact details likely won't be known until just before the deadline, but the broader aspects have been widely reported in Argentina's media: Rather than the quick cash payout ordered by the courts, it will offer new bonds that won't come fully due for up to 35 years. And rather than pay in full, the government will insist on paying no more than 30 percent to start with.
If true, this would amount to open defiance of the U.S. federal courts, Wall Street analysts say.
Argentina could keep appealing, but the U.S. Supreme Court has a long record of denying such cases. And that could be "suicide" for the South American nation's economy, says financial analyst Josh Rosner, managing director of Graham Fisher & Co. in New York.
"The court was looking for something simple, like: we're not going to pay them in a lump sum, but we're going to make a quarterly payment of the full $1.4 billion over three years. They weren't looking for creative financing where Argentina demands or forces a new bond," Rosner said. "What if somebody took that new bond, and the Argentine government defaulted the next day?"
Analysts voiced similar worries in Argentina, where defying the "vulture funds" is politically very popular, but economically dangerous.
If the government loses, "Argentina will be forced to decide whether to follow the decision or enter into technical default, a situation that would increase the country risk and deteriorate even more the price of publicly traded shares, as well as drive the parallel dollar even higher. This is not the most auspicious moment to run these risks," economist Ramiro Castineira concluded after analyzing how the government might follow through on its position.
The appellate court already ruled in October in favor of NML Capital Ltd., a hedge fund run by billionaire Paul Singer, basing its decision on the "parri passu" clause in the defaulted bond contracts, Latin for treating all bondholders equally.
Fine, Economy Minister Hernan Lorenzino has said repeatedly during this appeal: equal means Argentina will pay the plaintiffs no better than what the exchange bondholders got in 2005 or 2010.
Those bondholders have been steadily repaid, recovering much of their original investments over the years. But Argentina is apparently going to insist that the plaintiffs start with no more than what the other bondholders started with years ago, not what they've been paid to date, Castineira said.
"It brings us back to where Monday morning we're in a crisis because the Argentine government fails to meet its obligations and we're back to square one. Unless they sit down and make bilateral negotiations, they're probably headed to default," Rosner said.
"I think it will be important for people in Argentina to realize that offering a new bond is totally outside of what the court asked for, demanded or would accept," Rosner said. "They have to know that they can't win this."
President Fernandez and her economic team are proud of sharply reducing the country's foreign debt burden, and never failing to meet payments on the new bonds her government issued in exchange for the defaulted debt. But it still owes tens of billions to many other creditors, and until it settles those debts, its economy will be strangled by punishingly high borrowing costs, Rosner said.
Because of its deadbeat reputation, Argentina has had to look inward, essentially borrowing from its own people, fueling inflation, and trying to centrally manage the increasingly isolated economy by frequently changing the rules for exchanging currency, importing and exporting goods, setting prices and paying taxes.
Increasingly, Argentines are feeling trapped by the government controls, and foreign companies are being scared off.
Argentina's largest single foreign investment, a $6 billion Rio Colorado mine, railroad and port project to deliver potash fertilizer to Brazil, was suspended this month by Vale S.A., the world's second-largest mining company. Executives blamed Argentina's unpredictably high inflation and currency controls for laying off more than 4,000 people, despite having invested more than $1 billion and completed 40 percent of the construction.
"The controls are being put in place because of these unnecessary ideological battles. My attitude as an analyst is, I really don't care whether Argentina is correct ethically, or intellectually. It doesn't matter. At this point, they need to take care of their population," Rosner said. "How do you provide for the people? You bring in foreign direct investment and have Vale staying in the country and building out."
"There's an easier way out," Rosner said. "The government could say 'you know what, we fought for what we thought was fair and equitable, but for the greater good of Argentina, we have to put this in our past so we can normalize our relations with international markets, so that we can start having negotiations with the companies that have judgments against us with World Bank arbitrators, with the Paris Club, with the IMF, because at the end of the day the only way we can protect the lives of the Argentines we have sworn to protect is by not going down this dangerous path.'"