It was a game of chicken, and neither side blinked. Argentina and its holdout creditors failed to reach an agreement, and as a result Argentina defaulted Wednesday night, the second time it has done so in 13 years.
On Thursday, the Global X FTSE Argentina ETF (ARGT) was sharply lower, down over 4%, but I wouldn’t classify the action as “panic.” This correction merely took Argentine stock prices back to the levels of late June.
So, what is the story here? Shouldn’t Argentina be melting down?
We have to keep the default in context. Remember, Argentina has been largely locked out of global capital markets since its 2001 default, so the impact from the new default will be far less jarring. At this point, it is not as if there is much Argentina can do to make its reputation worse than it already is.
Furthermore, unlike in 2001, Argentina actually has the funds on hand to pay its debts. In fact, Argentina deposited the funds needed to make the current interest payment on its restructured bonds at the Bank of New York, claiming that it paid in good faith. Of course—as Argentina is well aware—the bank cannot actually pay the interest to Argentine bondholders without violating a court order. So…the funds sit there, pending a settlement between Argentina and holdout creditors.
While I don’t have much sympathy for Argentina—the Kirchner regime seems to revel in breaking all laws of economics and of basic common sense—I grudgingly have to respect them for being willing to see this to the end, come what may. It takes a certain kind of nerve to thumb your nose as the global financial system.
Still, there are consequences. Argentina’s currency will probably slide, which will make its already horrid inflation worse.
So, what happens now?
My best guess is that the standoff lingers until the first of the year but that Argentine stocks will continue to rally in anticipation.
One good candidate is Argentine oil company YPF (YPF). If Argentina’s currency slides, YPF could take a beating in the short-term. But given that its energy is priced in dollars, I would consider the risks here to be tolerable.
Action to take: Buy shares of YPF and plan to hold for 12-18 months. Use a stop loss at or just below $30.
Disclosures: long YPF
