— Steve Picarillo
Creative Advisory Group, Inc. has today commented on Argentina’s default. So what’s next now that Argentina is in “default”? “Certainly this is not good, but it is not as bad as it was after the previous default and the 2001-02 economic crisis,” said Steve Picarillo, President of Creative Advisory Group, Inc. in a statement.
“Unlike its previous default, the government has the money to can keep its economy going,” Picarillo continued. This default is equivalent to about 7 percent of Argentina’s GDP, compared with 40 percent in 2001, when the country defaulted on $100 billion in debt. At that time, the default resulted in turmoil in Argentina, with widespread looting, violence and triggered significant governmental changes. This chaos is not likely to reoccur as the economy is better than it was at the turn of the century and unemployment is much lower that the 22% level in 2001. Moreover, the economy is less dependent on the dollar, nonetheless, inflation is high and economic growth remains low. “Depositors aren’t at risk of losing their savings, yet many citizens are concerned about the prospect of reliving the past.”
The more immediate concern is the impact on credit default swaps, which provides investors with protection against default.
“The default will hurt the government’s ability to borrow on the international market but that’s nothing new for Argentina, as it has been cut off ever since its 2001 default,” Mr. Picarillo added. ”Still, the default would likely delay Argentina’s ability to get renewed access to the world’s capital markets.”
While default is a major catastrophe for the government, but not much will happen right away. Negotiations will likely continue. Technically, the default and the resulting rating action(s) gives holders of the previously exchanged bonds the right to demand immediate and full repayment. But considering Argentina’s fragile financial condition, the bondholders likely understand that repayment is near impossible.
“The more immediate concern is the impact on credit default swaps, which provide investors with protection against default,” Steve commented. “Should the International Swaps & Derivatives Association determine that a default has occurred, holders of the credit default swaps are entitled to a sizable payment.” Although the CDSs are not a direct obligation of the government, the impact on the financial markets and the CDS sellers, will impact the greater markets and boomerang back to Argentina’s reputation and economy.
So time marches on. The longer this default is goes on, the more painful it will be. While the peso is no longer pegged to the US dollar, (as it was in 2001), the currency is still subject to devaluation, albeit less dramatic devaluation. The citizens’ apprehensions will likely hit consumer and corporate confidence thereby retarding spending, which in turn will hit GDP and untimely employment. “The global economy remains fragile and uncertain, this default is yet another event that indicates that another global credit crisis remains a possibility.” Steve Picarillo concluded, “The stakes are large and the clock has rundown, overtime will be very costly.”
Steve Picarillo is a global financial markets, risk, banking compliance and communications executive with exceptional experience in risk analysis of global banking systems and financial institutions. Mr. Picarillo provides analysis and commentary to the financial community, the media, investors and regulators.
For additional information on Steve, please visit his website at www.stevepicarillo.com.
The opinions in this article are the views/opinions of the author and Creative Advisory Group, Inc. (CAG), based on public information and the author’s experience. This is not a recommendation to buy, sell or trade any security, debt or any other financial instrument. The author and CAG do not hold any interest in any of entities mentioned in this posting, and have no plans of entering into any financial trade in the same in the next 72 hours.
Company Name: Creative Advisory Group, Inc.
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