INSIGHT-Jaded Argentines brace for looming debt default

Tue Jul 29, 2014 1:00am EDT

By Eliana Raszewski and Richard Lough
    BUENOS AIRES, July 29 (Reuters) - Factory owner Norberto
Garcia was poised to launch a series of new toys this year after
grafting hard for the past decade to rebuild his business
following Argentina's 2001-2002 economic crash and debt default.
    Instead, he's hunkering down for a possible second default
this Thursday, cutting investment plans and scaling back his
targets.
    "We had plans to launch 11 new products. Now we are going to
release just three," Garcia, 70, told Reuters inside a cavernous
warehouse piled high with boxes of dolls, balls and plastic
rabbits. "We would rather keep the money to support the
company's structure as it is."
    Rather than sink 2.8 million pesos ($342,200) into expanding
production lines, he plans to cap the investment at 1.8 million
pesos.
    Garcia's wait-and-see attitude is typical of other
businesses who anticipate a slowdown in sales in a country
grappling with a surging inflation rate but are convinced any
economic downturn will be moderate. 
    While unsettling, the debt crisis today is a far cry from
the turmoil of Argentina's $100 billion default in 2002, and
Garcia is optimistic things will ultimately improve. 
    "What we lived through in 2001 was catastrophic. The anguish
was terrible, we didn't know what to do," said Garcia, whose
Turby Toy SA had to shut down its machines, offload most staff
and sell real estate at knockdown prices to weather the storm.
    Desperate to halt a massive run on the banks and a collapse
of the financial system, the authorities froze bank accounts and
devalued the peso. More than two dozen people were killed in
bloody protests.
    Argentina's record default sent shockwaves through global
capital markets and millions of Argentines lost their jobs as
the economy collapsed.
    Garcia says that he shut himself in his bedroom for three
days, dejected, until his wife kicked him out of the room.
    "I can't measure how much we lost in pesos. What we lost was
the dream," Garcia said.
 
    
    LIMITED OPTIONS
    Time is running out for Argentina to pay "holdout" investors
suing Latin America's No. 3 economy for full payment on their
bonds, or reach a deal that buys more time to avert a default.
    Argentina said on Monday that officials would travel to New
York for last-gasp negotiations on Tuesday but experts
increasingly believe the government in Buenos Aires may
calculate that a default would be cheaper than settling. The
latter, it argues, would risk legal claims from holders of
exchanged bonds that could cost hundreds of billions of dollars.
    How much pain a new default would inflict depends on how
quickly Argentina could extricate itself from the mess. 
    "The possibility of default, the exchange rate and
inflation, it's like a bomb," said Miguel Rizzo, director of an
import company that supplies Argentina's leading utility firms. 
    But the executive said he had limited means to counter the
risks. Rizzo was stockpiling what he could, in particular
cables, as an insurance against a possible devaluation of the
peso, but tough restrictions cap how much he can bring into the
country. Capital controls also make it difficult to buy dollars
to hedge his risk.
    The threat of a default combined with an ailing peso means
foreign suppliers are increasingly worried Argentine firms will
fail to make payments and as a result they are imposing very
difficult terms.
    "All big deals are being cancelled because of this default
that may happen," Rizzo said.
    Tough-talking President Cristina Fernandez calls the holdout
investors she is battling "vultures". She has not flinched in
public from her stance that they agree to the large writedowns
accepted by more than 90 percent of creditors in 2005 and 2010. 
  
    If Argentina defaults this Thursday it will be over a matter
of principle. This time around, the government is still solvent.
    It was not the case in 2001-2002. For months, protesters
fought street battles with anti-riot police, turning downtown
Buenos Aires' retail and financial zones into a battleground
with police firing rubber bullets from the backs of motor bikes.
    Banks were boarded up as desperate Argentines fought to
rescue their savings. President Fernando De la Rua quit and fled
the palace by helicopter to escape the baying mob.
    After the default, the government devalued the peso and 
seized U.S. dollars held in commercial bank accounts, exchanging
them for pesos. Rizzo watched helplessly as the firm's dollar
holdings evaporated overnight.
    "We lost almost everything," Rizzo said. 

    NO PANIC
    Today, the only sign of protest is a smattering of posters
on the odd street corner. They set vultures against the U.S.
flag running slogans like "Buitres contra Patria" or "Vultures
versus Fatherland."
    Instead, the most common heard complaint is sky-rocketing
consumer prices. Weary Argentines are swift to point out that
the grains-led economy lurches from one crisis to another more
or less every 10 years. 
    One of the world's highest inflation rates, fuelled by a
dearth of hard currency in the economy and a steep decline in
the peso, has eroded the purchasing power of Argentines. 
    Private economists estimate the inflation rate could hit 40
percent this year. That, more than the threat of default, is
changing spending patterns. 
    "I have cut out unnecessary spending," said 47-year-old
accountant Carlos Panero. "I don't travel to the beach on
weekends and I try to buy non-perishable goods."
    While some Argentines are grabbing deals offered in
superstores and stashing their purchases wherever possible,
including their car trunks, there is no panic buying.
    Nor is there a scramble to get money out of banks.
    Panero was lucky in 2001. His distrust for banks meant he
hid his dollars elsewhere, clung onto his savings and was able
to buy an apartment after the prices of property in dollar terms
fell sharply.
    Like others, Panero is resigned to Argentina having to
muddle through even longer without access to global debt markets
if Fernandez and the holdouts dig their heels in. 
    "This will mean less investment, fewer jobs, fewer dollars
coming into the country, so the government may tighten further
capital and import controls," said the father of two.
    Even so, there are signs the populist Fernandez could get a
ratings bounce.
    A poll published last week by Poliarquia Consultores showed
47 percent of Argentines believed Fernandez's government was
dealing with the holdouts in a "positive" way, compared with 38
percent a month earlier. Only one in four considered the crisis
was being handled in a "negative" way.
    Fernandez' leftist rhetoric may be striking a chord with
those Argentines who benefit from generous government subsidies
and social welfare payments.
    Argentina's economy rebounded after the 2002 crisis, driven
by lucrative agricultural commodity exports and printing of new
money to help spur domestic consumption. But demand for shrinks
surged too. 
    "It was a traumatic situation, 2001," said practicing
psychologist Cristina Gartland.
    "Now the situation is different. People are more confident
because they have jobs, the poor have social plans, workers have
more rights. In therapy, patients may talk about the economy,
but their focus is on their personal lives."
($1 = 8.1825 Argentine Pesos)

 (Reporting by Eliana Raszewski and Richard Lough; Editing by
Simon Gardner and Martin Howell)
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