It's the world's biggest game of chicken. Eighty-eight billion
dollars on the stake, political consequences in three continents and
effects that could ripple in the worldwide financial system. What's
there not to like in the story of Argentina's debt negotiations?

In a previous post I sketched a rough model of what variables could determine the outcome of this issue. Consistency being the hobgoblin of little minds, I'll now put forward a different one. Besides, what's the fun on never changing your opinions?

Argentina's Chicken Game Model

The story: Argentina owes U$D 88 bn. to private creditors
worldwide. It proposes (the "Nielsen plan", after Argentina's
Secretary of Finance Guillermo E. Nielsen) to pay 25 cts on the
dollar of that debt, while creditors want at least 65 cts. At the moment, the issue is being debated judicially in a New York federal court, and in the "court of international opinion".

The three critical variables, I think, are:

• 
  
• MaxArg: What's the maximum that Argentina would
  voluntarily pay?
• 
  
• MinCred: What's the minimum that the creditors would voluntarily accept?
• 
  
• JudSet: If there is no accord, how much will the courts force Argentina to pay?
• 
  

Depending on these variables, the possible outcomes are two:

• 
  
• If MinCred , then the final payment
  will be agreed upon, and somewhere between these values.
• 
  
• Otherwise, the final payment will be judicially set to
  JudSet.
• 
  

A somewhat simplistic analysis of course, but having a little mind, I'd rather deal with little models. Now, let's take a look at what these variables look like at the moment (keep in mind that these are variables; they are not only uncertain, but probably change over time).

• MaxArg: The Argentine's government posture on this has
  been extremely consistent: 25 cts on the dollar. As offering more would seriously harm Argentina's fiscal position and President Kirchner's political power, I think that he means to keep to this
  level, at least until (a) he has his hand forced so obviously that
  giving up seems so unavoidable that he cannot be blamed, or (b) he gets something big enough in return that it doesn't feel as a
  defeat (but what? his "Marshall Plan for the Americas"?).
• MinCred: Felix convinced me that both bond prices and the politics of international finance indicate creditors are
  expecting payments well above 25 cts, probably the full 65 cts (or rather the full commercial Argentine government assets, which is probably less). The position of involved national governments
  like Italy and the US doesn't seem to point to much willingness to negotiate below this level.
• JudSet:Judge Griesa's last decision (Forbes)
  suggest that the court will, unsurprisingly, force Argentina
  to pay creditors perhaps the full 65 cts they want (or 100 cts or even more; read the comments for an ongoing discussion on this).
• 
  

In my "condensed notation", wob::: ArgDebt2.MaxArg:::25 ArgDebt2.MinCred:::65
ArgDebt2.JudSet:::65 .

Given the model, this suggests that the Argentinegovernment
will eventually pay the full 65 cts or thereabouts. Either the government's assessment of this differs from mine (and let's be
clear on this: Argentina's finance functionaries are among the world's most seasoned experts in sovereign debt negotiations), or they don't, and they are playing for one of the alternatives (a) or
(b) that I mentioned. For the moment it's giving President Kirchner
good standing with the Third World, and a certain backslash from the developed nations (less than I would have thought at first, although
Kirchner's cancellation of his trip to Davos is both suggestive and
worrisome). January 31st is the deadline for a voluntary accord, and after that, well, then it's going to get interesting for and
in Argentina.

Of course, there's probably something I haven't factored in this, something obvious to you that I have either forgotten or never heard about. Post a comment. Criticize the model. Put forward data. Use the proverbial back of the envelope. Let's have fun doing analysis... and
then we'll have fun trying to dissect why we missed what we missed, after this settles down.

(By the way, I want to thank Edward, Felix and other people for their spirited give-and-take in the comments of past posts about Argentina's possible growth paths. Make sure you read them; in a sense, these posts are but pointers, and a lot of the intellectual
meat lies in the comments.)

The problem with this is that JudSet is either 100 (actually, significantly more than 100, since compound interest will be included) or 0, depending on how you look at things. If a creditor gets a court judgment, he will get that judgment at par, plus interest -- say 130 or so, give or take. That's the easy bit. The difficult bit is collecting on it: a US judge can't simply magic the money out of Argentina's foreign reserves. That's the thing about sovereign nations: they're sovereign...

*Slaps forehead*. I knew that, I just forgot to include it. My impression is that collecting $88 bn + interest damages would be so difficult that bond holder would rather settle even with a favorable judicial outcome, and that facing such a troublesome situation [in actuality or as an unavoidable outcome] the Argentine government would settle at some point near 65 cts with relative political grace. So JudSet is effectively 65 cts, because that would satisfy bond holders and that's better for the Argentine government that a full embargo on comercial assets. Given the situation, settling would seem the rational thing to do.

OTOH, I might be wrong in any of these assumptions. What do you (both Felix as everybody else) think? What would actually happen if there were a negative decision about Argentina, and would it be bad enough that the government'd rather negotiate at, say 50 cts per dollar?

Argentina is going to lose the court cases. Argentina knows that it is going to lose the court cases. Argentina is negotiating on the assumption that it is going to lose the court cases. The fact that it has lost a court case in the US is not going to make it up its offer from 25 to 65. What's more, someone who has a court judgment for 130 might not accept a deal for 65: a court judgment is a more powerful debt instrument than a bond.

To head off what could be a possible response to Felix's first post: Not only can a US court not force the Argentine govt. to cough up money out of foreign reserves held in Argentina, the US court cannot force the Argentine govt. to cough up money out of reserves held overseas (at say the Fed. NY).

Those reserves are not by the Arg. govt, but by the BCRA (central bank). As seperate entities, the BCRA cannot be held responsible for debts incurred by the Arg. govt.

(And as Arg. is nominally sovereign over it's embassies, we can't confiscate the chancery in DC or UN mission in NY, either)

(these questions have been asked during previous debt negotiations, and I thought we'd skip over them this time 'round...)

I've seen mention of Dart doing something similar in the 90s in Brazil, and settling in '96. But I don't know what the figure settled for was (either as a lump or as cnets on the dollar). Any insight?

My impression is that, as Felix says, Nielsen's team _knows_ that it's going to lose the case. But, as Mike points out, you can't just send a couple of guys over to collect your USD 88 bn + interests from a sovereign country, specially one without (I think) many assets out of its borders.

What I'm trying to understand is this: if effectively JudSet >= 130 (heck, if it's anywhere above 65), then Argentina should rationally settle *now* - should have settled long ago. As the negotiation team is, inside of certain politically motivated bounds, rational, yet Argentina isn't settling, I'm guessing that JudSet would, in practice, be lower, so even when they win the case (given how little assets the Argentine government has abroad) it'd still make sense for the creditors to settle... or at least this is what Argentina is counting on.

Some alternatives (perhaps not all of them probable, but I don't know enough to disprove them):

* Argentina has no middle-term game plan, effective JudSet is high, and we're gonna get into trouble (whether we comply or not)

* Argentina's plan, when and if it loses the case, is to divert assets, pay as little as possible (eg, do what particulars do when facing debt collection; putting the car under an spouse's name, etc), reap political advantages at home and abroad and just generally weather it as much as possible until it all blows away. (Not something I'd recommend, but perhaps a possibility in some politician's mind.)

* There is another, deeper layer of negotiations going on (that is, MaxArg isn't 25, and perhaps MinCred isn't 65 after all), and this court case provides both pressure for creditors against Argentina and political cover at home for President Kirchner.

* Kirchner is actually hoping to win the case.

What do you people think? In particular, what do you think the Argentine team is thinking? I believe the factual accounts so far in these comments are generally accurate (with all exceptions being mine), but what I'd like to make explicit is a picture of the strategy that both sides (or are there more?) are playing out.

with the exception of the last one, none of these options are mutually exclusive, and i would imagine that to some extent or another, they are all the case.

if Kirchner seriously thinks the last one, then i think Argentina's in trouble. I don't think he thinks (this can get very "meta" very quick) that, though...

Hi, I don't know how much you guys know about all this, but maybe you can comment on my perception of the "model".

First of all I do not think that judical pressure is a matter of concern directly. As you mentioned, even if a court would convict them to pay 1,30 on each dollar of debt, I hardly see why they should repay then. I don't think that a court judgement is more powerful then a bond.

The reason why I think that renegotiations matter is that Argentina is suffering from the current state of being "in default". I can't say precisely how, but I suppose that international (and maybe even domestic) financial relations/transactions of the public and private sector are seriously hampered. So I'd introduce a variable "CostDef" for the damage done to the Argentine economy due to being in sovereign default.

The other element I would add is that I think that the prospect for the Argentine economy is better, the more fiscal flexibility the administration has. For the creditors this means: every cent squeezed out of Argentina now will reduce future payment possibilities (e.g. more taxes have to be collected or political instability arises).

I see to possible results for restructuring:

(1) - depending on CostDef you can calculate a price that Argentina is willing to pay to end the current situation, i.e. a MaxArg. In a static setting I don`t see why they would ever agree to pay more.

(2) - the parties find a way of sharing the surplus to the Argentine economy of not having to pay. For example only a small fraction is paid today, but new bonds running 5 or 10 years are given to the existing bondholders.

The (2) approach requires a certain trust from the creditor side which may render such an agreement unrealistic in the current situation. The (1) approach is more likely to describe the current situation:
Both parties do not really know how high CostDef is. So Argentina is making an offer that is so low that they can be sure that situation will be no worse than today, i.e. the "pain" of remaining in default is higher than the agreed payment. The creditors of course don`t want Argentina to benefit from the agreement, but extract as much as they can. So their strategy is all about finding out what MaxArg is and keeping it high. The latter can be done by litigating Argentina in all absurdest ways so that the Argentine economy suffers the most. I believe this pressure (keeping CostDef / MaxArg up) is driving negotiations much more than the possibility of a sentence.

Of course there is also a third party, namely the IMF or any other official organization, playing in this game. For example the IMF could make a (1)-agreement a (2)-agreement just by offering Argentina a loan large enough to repay the creditors. Something like 0.6*$88bn is probably not doable for the IMF for various reasons, but in anycase official money can enlargen the set of potential results and thereby ease agreement.

I highly appreciate your comments!

ossip, hi.

You raise interesting points. Yes, Argentina is probably suffering for being in default, and there is a tradeoff for creditors between getting money now and getting more money later. Indeed, those creditors with long-term outlooks [i.e., corporate or professional investors] are content to mostly wait and let interests accumulate *as long as they are going to get them later*. But Argentina is definitely not acting as if this negotiation hurts it, or as if there is any possible outcome other than paying 25 cts (see my last posts here and at BonoboLand http://www.livingontheplanet.com/bl/ ), which puzzles me to no end and throws doubt on the whole model. Something weird seems to be going on, and I don't like the things I suspect...

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