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Published On: Mon, Aug 4th, 2014

Argentina defaults unable to pay existing debt

Argentina defaulted for the second time since 2002; investors still hope for a deal, an agreement with holdouts is expected by the end of the year.

Argentina defaults unable to pay existing debt

Argentina defaulted for a second time in the past 12 years. The last resort, the talks with the creditors, ended in an impasse. The second default since 2002 has followed prolonged grappling with hedge funds which rejected the debt restructuring solution.

Argentina, the third largest economy in Latin America, did not manage to meet the payment deadline. The instant attention was focused on the possible declaration of a “credit event” by a group of large banks and funds under the supervision of the International Swaps and Derivatives Association. Following such ruling, an insurance payments series would start, and most present bondholders could immediately claim their funds back. The deadline is August 4.

The debt insurance cost against default plummeted Thursday, but investors were discussing a longer term deal. The reason for the default was the lawsuit rather than Argentina’s inability to repay the existing debt. Argentina bankers provided the amounts for repaying present bondholders, but a US legal ruling stipulated the first payment should be made to holdout bondholders.

The default could get more complicated and clearing up would take longer if creditors demand early bond payment, although some investors deem that unlikely. Expectations are for an agreement with holdouts, possibly after foreclosures expiry, by the end of the year.

Bonds rallied Wednesday together with Buenos Aires stocks and the peso. After the talks failed, however, the developments were uncertain for traders. With a brief default, local companies’ borrowing costs will hike, pressure on the peso will strengthen, draining foreign reserves and sparking possibly the highest world inflation rate.

Argentina failed to get suspension of the New York District court ruling on its paying holdouts, totaling $1.33 billion, plus the interest. The ruling stated Argentina could only service its exchange debt if simultaneously paying holdouts. Another failed proposal was for Argentinian banks to purchase hedge funds non performing debt.

Yet the current situation is far less formidable than the one 12 years ago, when the government went bankrupt and the economy collapsed. Unlike then, nowadays the Argentinian government is solvent. The severity of the default impact will depend on the speed of the government’s ridding itself of the obligations. Without a problem of solvency, speed of resolving is paramount.

As Argentina stated, agreeing to hedge funds’ demands for full payment would break a clause preventing the offering of better terms thansteep writedowns. The clause holds valid by December 31. Then the government would have the chance of getting a deal, which is the hope of numerous economists and investors.

If no deal is reached, the turmoil expected abroad would not be that high, as Argentina has been isolated since its first default in 2002. Its foreign currency restructured debt amounts to about $35 billion, and its foreign exchange reserves to $29 billion.

The credit rating awarded by the Standard & Poor’s rating agency was downgraded to ”selective default”. The default rating will be in effect until Argentina makes the overdue coupon payment on discount bonds which mature in 2033. Partial payment was made to creditor states on July 28 and 29. Germany is the largest individual creditor of Argentina, and expects the next installment by end of May 2015.

About the Author


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