Peronists in Athens or the Politics of Greek Haircut

A little off the top; a little off the side. Monitoring how things are going in South America's second largest economy nearly a decade after its default and subsequent two-thirds haircut on the face value of its sovereign bonds is interesting for obvious reasons. In particular, how would the Greek PASOK socialist government fare in the aftermath of taking the clipper and shears like its Argentine predecessors? Certainly, the Peronists holding on to the reins of power even today after overseeing the styling job on its creditors is some comfort to the Greeks. With even EC economists letting on the inevitability of a haircut--albeit of the controlled rather than the uncontrolled variety--it's off to the barbershop, I guess.

The analogy is certainly imperfect. The Greeks are trying to work out matters within the monetary system via a troika of orthodoxy (IMF, EC, ECB) instead of casting their lot out like Argentina did some years ago. There are huge implications here for having to meet conditionalities set out by others. Unlike Argentina, nor has Greece come to that point when it's contemplating being shut out indefinitely from international credit markets.

Still, if defaulting does help ease Greek worries, what's there to ultimately stop them from doing so as a sovereign entity? Certainly the political fortunes of the Peronist Kirchner clan have been, in reality, quite favourable since administering the aforementioned haircut. And, for them at least, rolling on another electoral victory only confirms the political benefits of hairstyling if done in a populist, socially redeeming fashion. That is, if you can administer the daftest hairdos to distant foreign devils, so much the better:

Argentine President Cristina Fernandez de Kirchner won re-election to a second four-year term today with the highest percentage of votes in four decades. Fernandez had 53 percent support with 23 percent of votes counted, according to results on the Interior Ministry’s website. That is the biggest tally since Juan Domingo Peron returned to power in 1973 after a two-decade exile.

The interesting thing is that debt matters have not been fully sorted out, with the current cost of insuring Argentine paper approaching that of today's more troubled economies. Can Kirchner take a whomping re-election as a mandate for giving creditors another trim? Capital flight remains a constant threat...

[I]nvestors remain wary of South America’s second-biggest economy a decade after its default on $95 billion of bonds. Traders see a more than 40 percent chance that Fernandez will stop payment on the country’s debt in her second four-year term. The cost of insuring against default for five years rose 406 basis points to 1,016 this year. The increase is the biggest in the world after Greece, Portugal and Pakistan.

Argentines pulled $9.8 billion out of the country in the first half of this year, compared with $11.4 billion in all of 2010, as the debt crisis in Europe worsened and prices for grain exports to China fell. The capital flight led the central bank to sell $2.7 billion of reserves in August and September to control declines in the peso.

We then return to the heart of the matter: the $95 billion default. Argentina has juggled its obligations by negotiating piecemeal with some private lenders willing to just give in and take a big haircut, utilizing hit-and-run tactics agsint the Paris Club of major sovereign lenders, and telling the IMF to, well, beat it. An unalloyed fear, of course, is that a cataclysmic 2001-ish event could prove to be the showstopper that undoes various kludges for what they are:

Against the worsening economic outlook, Argentina hasn’t regained access to global credit markets since its 2001 default. Fernandez restructured almost $13 billion in bonds outstanding from the default last year, yet creditors holding about $4.5 billion are pursuing payment in court. Without being able to sell bonds abroad, Fernandez has tapped central bank reserves to make payments on debt and plans to use $5.7 billion in savings next year for the same purpose.

The country hasn’t allowed the International Monetary Fund to review its finances [via Article IV consulations], as it does for every other member country, since 2006. It’s also failed to reach an accord with the Paris Club group of creditor nations to settle claims on $9 billion in defaulted bonds.

“Is the central bank going to finance us for the rest of our lives or will we resolve differences with the Paris Club and IMF?,” said Maximiliano Castillo Carrillo, a former manager of macroeconomic analysis at Argentina’s central bank who now runs ACM, a Buenos Aires-based research company. “What we want to see is some kind of path.”

It's not a strategy that's won Argentina's central bankers accolades in recent years, but it also suggests political capitulation does not necessarily accompany economic capitulation (for what it's worth). Carefully juggling private, official, and quasi-pan-European lenders is difficult, but it does marginally return your fate into your own hands even if some will inevitably vilify you.

Then again, living on the edge is generally preferable to eking out something worse.

UPDATE: The powers-that-be are now asking Greece's private bondholders for a 60% haircut. I guess it's inevitable; the only question is the magnitude--from between three-fifths to two-thirds of face value.