Argentina On The Verge Of Default - Again

July 8, 2014

A financial time bomb is ticking again in Argentina, with the possibility of another default on that country's sovereign debt. How could this happen?

With its economy virtually bankrupt in 2001, Argentina defaulted on about $100 billion of debt.  A majority of bondholders agreed to take a 66% haircut and were issued new securities, on which Argentina has paid regularly.

But a small minority of bondholders opted not to restructure, sued for full recovery and have won about $1.5 billion in court — an amount the Argentine government has refused to pay.

Then last month the U.S. Supreme Court declined to review an earlier district court ruling that Argentina must pay the "holdouts" at the same time it pays investors who own the bonds issued after the 2001 default.

What this means, in practice, is that if all bondholders aren't paid by the end of July, Argentina will have once again defaulted on its sovereign debt.

Argentina can ill-afford a second default in 13 years. Its economy is in recession, inflation is raging at double-digit levels, the country's trade deficit is widening and fully two-thirds of Argentines expect their economy to worsen over the next six months.

What's more, a second default would close the door to international capital markets, to which the country has had only limited access since 2001.

Another default would also diminish the prospects for foreign investment in Argentina's energy industry, the economic sector with the most promising growth potential.

According to the U.S. Energy Information Administration, Argentina ranks third worldwide in deposits of recoverable shale oil and gas that, if exploited, could make Argentina once again a net energy exporter.

But because of mismanagement, wrongheaded economic policies and a failure to abide by international law, Argentina is importing energy at a cost of nearly $10 billion annually.

Argentina has been working hard to attract foreign investment to the 30,000-square-kilometer Vaca Muerta shale play situated in the arid west central region of the country.  This field is 3,000 feet deep and three times as thick as the Eagle Ford in south Texas, the most productive shale play in North America.

According to the International Energy Agency, the Vaca Muerta could contain more than 20 billion barrels of oil equivalent with roughly 70% being oil and 30% natural gas.

Several American companies have placed bets on the Vaca Muerta, most notably Chevron, which recently signed an accord with Argentina's national oil company (YPF) to invest $1.6 billion in 170 wells this year with future investments up to $15 billion.

But should Argentina once again default on its sovereign debt, Chevron is likely to have second thoughts about its commitment to the Vaca Muerta project and other foreign investors are likely to either wait on the sidelines or demand more favorable terms for participation.

Full development of Vaca Muerta will cost upward of $250 billion, and foreign investment is critical. Another default will at best push this project far into the future or at worst result in even greater capital flight from Argentina.

The solution is simple: The Argentine government must sit down with the holdout bondholders and negotiate a settlement by the end of the month. Not only is default avoidance critical for developing the Vaca Muerta oil and gas field, it is imperative if Argentina wishes to regain full access to global financial markets in the future.

• Weinstein is associate director of the Maguire Energy Institute in the Cox School of Business at Southern Methodist University and a fellow with the 4 Percent Growth Project of the George W. Bush Institute.

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