Argentina Is Getting Clobbered

Since Tuesday the Argentine stock market, the Merval, has been sinking. On Wednesday it fell 7%. In the last five trading days the index is down around 13%.

Investors are losing faith that the current administration will settle with holdout bondholders - "vultures" as President Fernandez calls them - in 2015. That's when a clause in their bond contract that the Argentine government says prohibits them from negotiating with the holdouts, the RUFO (Rights Upon Future Offers) clause, expires.

A lot of investors were betting that 2015 would come around, and Argentina and the holdouts - led by Elliott Management founder Paul Singer - would sit down and sing Kumbaya. Instead Argentina is coming up with more creative ways to raise cash, like a recent debt swap plan the government has announced to raise $3 billion locally.

The country owes about $12 billion in cash next year, according to Bloomberg.

"...a successful debt swap also aims to strengthen the government's bargaining position with the holdout creditors as a stronger domestic liquidity position would enable the CFK administration to continue to play a hard hand and renege on the holdouts proposed claims," says Oxford Economics Senior Economist Aryam Vasquez. "In addition, if successful, the swap would provide the administration with much political capital as the CFK government has been advocating the use of local law bonds in view of resolving the debt holdout issue."

The debt swap could be subtle way of letting the holdouts know that RUFO was a way for Argentina to buy time to figure out a way to raise money without going to the international market.

This is less subtle:

"Argentina does not need to settle with the holdouts because it already won," said Federico Tomasevich, the President of Argentine investment bank Puente. "The international community is siding with Argentina on the issue of the vulture funds. The case is closed. That isn't say we can't calmly find a give the issue a proper resolution, but that will be for the next government."

That next government won't be elected until the end of 2015.

Now - some investors did see this coming. Hedge fund Fir Tree Partners shut down their Argentina fund earlier this month after gains of 20%. It's a signal that they believe things are only going downhill from here.

And despite what seems like signs of Argentine optimism - and cash the country borrowed from the Chinese - Fir Tree may very well have a point. Argentina's relies heavily on commodity exports like soybeans for revenue, and commodities are getting crushed.

It's clear that the country's 40% inflation rate is putting Argentines on guard. They're carrying lots of cash around, afraid that a crash could come and make any pesos they have stored in the bank basically worthless (or government property).

And because they carry around all that cash, Argentina has become the robbery capital of Latin America, according to a United Nations report. Mexico comes in a distant second.

So no matter what happens, 2015 won't be a cakewalk for the current regime. The economic situation is bad, and to make matters worse, an Argentine Judge is investigating President's personal business for corruption. Agents even raided the Kirchner family hotel, Hotesur. When they got to Hotesur headquarters, it was empty.

Go figure.