On 31 July, Argentina faced its second sovereign debt default since the turn of the century. However, this event didn’t affect its short-term political risk classification in category 5. Why not? Because Argentina’s ability to pay has remained broadly unaffected for 2 reasons:
- the sovereign already lacked access to international financial markets;
- strict controls continue to curb capital flight.
Things are likely to remain in gridlock until after the presidential elections of October 2015. A new administration may then renew efforts to mend ties with international capital markets.
Dialogue was put on hold when the US Supreme Court refused to hear Argentina’s appeal against an earlier verdict. This obliged the country to offer full repayment to a group of hold-out creditors. Public outrage about the claims of these so-called ‘vulture funds’ prevented the Kirchner administration from complying with the verdict. It opted for default instead.
The default issue is bound to animate the upcoming elections. Sorting this out is of key importance to address the prevailing macroeconomic imbalances. For now however, Argentina is expected to remain firmly locked in stagflation territory. Forecasts for 2015 indicate a recession of 2% of GDP and inflation above 40%.
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