As of September 30, Argentina's foreign exchange reserves stood at $34.8 billion, their lowest level in six and a half years, according to the Wall Street Journal. Since 2010, the government has used $39 billion worth of central bank reserves to pay down its foreign debt, and it is planning to spend another $9.86 billion on debt payments in 2014. Following its 2001-02 sovereign default -- which at the time was the largest in recorded history ($100 billion) -- Argentina was virtually shut out of global capital markets, and its exile has now lasted more than decade. This means that Argentina's most important source of foreign currency is its trade surplus. Unfortunately, that surplus has been shrinking dramatically: It was 59 percent lower in August 2013 than in August 2012.
To make things even worse, some of Argentina's former creditors continue to demand full repayment of defaulted bonds -- and on August 23, a New York-based appellate court ruled in their favor. In its decision, which upheld a 2012 district-court ruling, the U.S. Second Circuit Court of Appeals affirmed that Argentina must put $1.33 billion into an escrow account. The bondholders seeking that money have refused to accept the terms of prior debt restructurings conducted in 2005 and 2010. Ratings agency DBRS said the Second Circuit ruling "materially increases the risk of a default on Argentina's restructured bonds issued under New York law."
This past Monday, the U.S. Supreme Court formally declined to hear Argentina's appeal in an earlier bondholder case. That was obviously a setback for the Kirchner government, but it was not the end of the road. Had the Supreme Court heard the appeal and then ruled against Argentina, the nation's seemingly inevitable default would have happened much sooner. Instead, the government now has some breathing room. It has asked the Second Circuit to rehear the case that was decided on August 23. If (or when) the Second Circuit rejects that request, Argentina can once again appeal to the Supreme Court.
Moreover, the Kirchner government has already indicated that it will not comply with any U.S. court order to compensate the bond holdouts: Last November, Argentinian economy minister Hernán Lorenzino told a Buenos Aires newspaper that the government would not pay any former creditors who refused to participate in the 2005 and 2010 debt restructurings. Thus, following the October 7 Supreme Court ruling, Ted Olson, the former U.S. solicitor general who is now representing one of the hedge funds (NML Capital) suing Argentina, issued a statement reading in part: "Argentina's representatives have asserted that it will file another petition, but the facts of the case and Argentina's disregard for the rule of law remain the same. That petition also should be denied."
Regardless of how or when the bondholder litigation is resolved, Argentina's economy is slowly imploding. It has fallen behind all but two Latin American economies (Venezuela and Cuba) in the Heritage Foundation's Index of Economic Freedom, and it now ranks lower than Swaziland in the World Bank's Ease of Doing Business Index. For that matter, in the World Economic Forum's latest Global Competitiveness Index, Argentina trails several of Latin America's poorest nations, including Guatemala, El Salvador, Bolivia and Nicaragua.
The WEF notes that, given factors such as Argentina's market size and its high level of university enrollment, the country still has "enormous potential." Right now, however, that potential is being wasted -- and the situation will almost certainly get worse before it gets better.
