James Downer is a student of International Relations and Computer Science and is fascinated by the collision between the two subjects. In this article, Downer discusses last Wednesday's debt default by Argentina, bitcoin's growing role in the country and its thriving black market for dollars.
If Argentina’s 'Default Wednesday' had been as bad as its 2001 debt default, the country's citizens would be scrambling en masse for alternatives to the peso – such as bitcoin.
When Cyprus, with a population of just over a million, suffered a financial crisis in 2013, freezing bank accounts and eventually confiscating money from private accounts, the fear piqued the interests of bitcoin enthusiasts worldwide.
As the situation in Cyprus hit the media, the bitcoin price surged from $47 on 17th March when banks closed, to a staggering $266 on 11th April, shortly after their opening.
Argentina’s 2001 default was eerily similar to the Cyprian crisis with property seizures and frozen accounts. Now Argentina, a country of 41 million, finds itself in default for the eighth time since liberation from Spain.
In the first major sovereign bankruptcy since Cyprus, what might this mean for bitcoin?
A history of the recent troubles
The years of financial troubles which led to Argentina’s default on Wednesday have their roots in the total chaos that gripped Argentina at the end of 2001.
On 21st December 2001, then Argentinian president Fernando de la Rúa fled La Casa Rosada, the presidential office, by helicopter. Because his vice-president had already abandoned his post that October, President of the Senate Ramón Puerta took office for that day and the next. On the 23rd, he passed the baton to Adolfo Rodríguez Saá, who during his one week in office defaulted on Argentina’s debt of $132bn.
Saá's own party withdrew their support for the new president before the 31st and Eduardo Duhalde was appointed his successor. It wasn’t until Néstor Kirchner took office in 2003 that things returned to normal.
The riots that lead to this revolving door started three weeks prior to de la Rúa’s flight, when his government announced a 'corralito', or fencing in of bank accounts. The corralito was a last-ditch attempt to postpone default and maintain dollar reserves by capping the number of pesos that citizens could withdraw at $250 per week.
High-stakes game of chicken
In both the Cyprian and 2001 Argentina defaults, the cause was a clear insufficiency of reserves to pay obligations. Because of this, Argentina’s current default is rather unique.
Argentina elected to play chicken with foreign credit markets, declaring that they wouldn't pay unless the holdouts accepted the same terms as the other 92% of bondholders – 65 cents on the dollar. The restructuring that set these terms occurred in 2005 and 2010.
During this time, Elliot Management Corporation CEO Paul Singer has maintained that his firm deserved to be payed in full, even though they only purchased the bonds for a few cents on the dollar during the default.
This spring it managed to convince a lower New York court, not only that Argentina must pay, but that payments to the other creditors would be held hostage until the country could see eye to eye with Singer. Argentina appealed the case to the US Supreme Court, but the justices refused to hear the case.
The collateral damage from all of this will hurt New York as a financial centre, crush Argentina’s ability to get international credit, and make future restructuring of debt much more difficult.
While the default most certainly doesn’t mean another episode of corralito and property confiscation, it will worsen Argentina’s inflation. The country is currently projected at just shy of 40% inflation for 2014 and is also entering a recession.
Because of the default, foreign credit will be even harder to attract to Argentina and, as a result, the country will be forced to take on more debt and devalue the peso to maintain reserves.
The combination is clear. Inflation will rise and Argentina will remain an outsider to financial capital markets for a while longer.
Inflation could boost bitcoin
Argentina is without a doubt a leader in bitcoin development, use and leadership in Latin America – and high inflation only reinforces this adoption.
Co-founder of the Bitcoin Foundation of Argentina, Franco Daniel Amati echoed the sentiments of every single bitcoin user I’ve talked to in Argentina with his reason for adoption of the digital currency:
“We know the peso will lose value – and probably rapidly. With bitcoin, even if it just maintains price, it’s a huge advantage for us Argentinians.”
Additionally, bitcoin gives common Argentinians options: it offers a solution to the US dollar exchange lockdown that has resulted in a 50% difference between the official and non-official exchange rates. Those who want access to a more stable store of value can have that without frequenting the black market.
Benefits for locals and tourists
The connection between adoption and inflation isn’t just personal, either. BitPagos, an Argentinian payment processor based in Buenos Aires, addresses this exact need by allowing merchants to receive payments in bitcoin.
Founder and CEO, Sebastian Serrano grew wise to this need and has been growing quickly, targeting primarily hotels where foreign clients face enormous charges for using credit cards.
Don’t look to Argentina to be the cause of a short term speculative spike in price, but rather take it as an example of the true uses of bitcoin and the steady adoption of the technology in a country that yearns for financial sanity.
Peso closeup image via Shutterstock
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