Argentine default looms as talks fail

July 27, 2014 - 12:34:52 am
Argentinian Minister of Economy Axel Kicillof (left) and Argentinian Foreign Minister Hector Timmerman during the inauguration of the Council of Ministers of Bank of the South, in Buenos Aires, Argentina.

BUENOS AIRES: Argentina looks set to default on its debt for the second time in 12 years next Thursday as negotiations with “holdout” investors seemingly go nowhere and neither side shows signs of blinking first, though a last minute deal can’t be discounted.

Latin America’s No. 3 economy has for years fought the holdout hedge funds which snapped up its junk bonds after its $100bn default in 2002 and then refused the restructuring terms, suing for repayment in full.

But time is up. After a slew of legal setbacks for Argentina in US courts, the country has just days to comply with a 2012 ruling by US District Judge Thomas Griesa to pay $1.33bn plus interest to the funds it calls “vultures.”

If the deadlock persists, Griesa will prevent Argentina from making a July 30 deadline for a coupon payment on exchanged bonds, triggering a new default just as the economy struggles with recession, dwindling reserves and soaring inflation.

“The outcome is still uncertain, with just days before a technical default is triggered,” said analyst Mauro Roca of Goldman Sachs. “A deal now seems unlikely.”

Unlike Argentina’s 2001-2 debt crisis when it was broke and could not pay its civil servants, this time around the country is solvent but prevented by Griesa from servicing its bonds until the battle with the holdouts is resolved.

Argentina’s combative stance has upped the odds of a default. Efforts to find a solution through a mediator have made scant progress, with one of the lead holdouts saying the government had made clear “it will be choosing default”.

Argentina’s President Cristina Fernandez has not minced words, branding the holdouts extortion ists and lambasting the judge for a ruling she says is unjust.

The government argues a deal with the holdouts would leave it at risk of breaking the so-called RUFO clause which bars it from voluntarily offering better terms to investors than what it gave in the bond swaps accepted by 92.4 percent of creditors. RUFO stands for “rights upon future offers.”

With the RUFO clause set to expire on December 31, Argentina wants a stay on Griesa’s ruling to allow negotiations without risking claims from exchange bondholders that the government estimates could hit $400bn. So far, the judge has refused.

A high-stakes game of poker is playing out. Griesa’s ruling prohibits Argentina from servicing its restructured debt until it settles with the holdouts.

If neither side flinches, Argentina will default as of July 31. Although it will have sufficient finances to service its foreign currency restructured debt, worth $35 billion, it will be unable to get payments to creditors outside Argentina.

A default won’t send shockwaves through the global economy: Argentina is already isolated from international capital markets. How much pain it causes at home will depend on how quickly Argentina can extricate itself from the mess. That will largely be determined by whether Argentina persuades bondholders it is ready to negotiate a swift settlement after the December 31 expiration of the RUFO clause.

If it can, there is less chance of a so-called “acceleration” demand by bondholders for early payment.

Bondholders might then simply have to wait a few months for their payments.

In this scenario, Argentina’s banishment from global markets would remain and borrowing costs for Argentine companies and provinces would rise. “We’d likely see higher yields, which is bad for the investment environment, and a default could spark some capital outflows which would start putting a strain on the currency again,” said David Rees at London-based Capital Economics. That would likely push Argentines to increase their dollar holdings, weakening a peso already down 20 percent so far this year. 

Reuters

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