Duration of Argentine default the main economic variable

In the wake of Argentina's second debt default in 13 years, attention is turning to the likely economic impact on the country and its neighbors.

While the financial market consensus is that spillover effects are likely to be minimal, the impact on Argentina's economy will depend heavily on the timing of any resolution to the selective default.

Unlike the 2001 default, Argentina now finds itself in a much better economic situation with a default that has not come about as a result of insolvency or even a liquidity problem. Moreover, the default will apply to the country's New York law bonds covered by court orders and not to other classes of bonds.

"This is not a rerun of 2001, when Argentina was buried under a mountain of external debt and a grossly overvalued exchange rate," said UBSeconomist Rafael de La Fuente in a note to clients.

Talking to BNamericas, Mauro Roca, a senior Latin America economist at Goldman Sachs, said: "The mere triggering of this default would not have immediate consequences for the economy, but its negative consequence would proportionally increase with its duration."

In the short term, the main negative effect we are likely to see are that some provinces and corporates will find it more difficult to access international markets, added Roca.

In a note to clients, Casey Reckman of investment bank Credit Suisse, outlined a central case where Argentina attempts to cure the default and settle with all holdout creditors during the first half of 2015.

"An upside resolution scenario could involve a private deal, such as the one recently proposed by a group of local banks, in the near term. In a downside scenario, these issues would be left for the next government to resolve in 2016," said Reckman.

Goldman Sachs' Roca noted a similar range of scenarios. "If it is true that the main restriction was the RUFO clause [which prevents the government from offering anyone a better deal than what the creditors who tendered their bonds accepted in the 2005 and 2010 swaps], it implies that the country will have more room to negotiate a deal once the clause expires at the end of the year. Under that scenario, there are going to be some consequences on the economy, including an increase in exchange rate pressures, some acceleration in the rate of decline of international reserves and even additional drag on economic activity that is already in recession, but the overall effect could be mild."

"In the alternative scenario where resolving the default takes longer than expected, due for instance to acceleration of the bonds that might be more difficult to cure, then the impact on the economy will gain in importance," added Roca

For De La Fuente of UBS, "because the Republic was already essentially cut off from international bond markets, losing financial access should be less of a hit than it was then [in 2001]."

In addition, De La Fuente noted that raising financing for capital projects will become more difficult. "It would make it very difficult to get the financing needed for key capital projects that are critical to the country's future development," especially the Vaca Muerta shale oil and gas initiative.

David Rees, emerging market economist at Capital Economics, took a different angle, looking instead at the impact on Argentina's neighbors in his commentary.

"Default is most likely to be felt by other countries through the trade channel. In this regard, it seems that neighboring Brazil and Uruguay stand to lose the most, although the numbers involved are small. Brazil sends about 8% of its exports to Argentina while Uruguay ships about 7%. In both instances, exports to Argentina are worth around 1% of GDP," said Rees.