Argentinian finance minister Axel Kicillof

Everyone's crying for Argentina as it defaults again

It's the second time in 13 years the country has defaulted. The real casualties will be businesses and institutions, for whom borrowing is about to become uncomfortably high.

by Emma Haslett
Last Updated: 31 Jul 2014

So the inevitable has happened and Argentina has defaulted on its sovereign debt for the second time in 13 years, after talks between its government and ‘holdout creditors’ (or ‘vulture funds’, depending on whose side you’re on) didn’t work out.

The country’s been at loggerheads with aforementioned creditors since 2001, when it defaulted on $100bn of debt (at the time, the biggest sovereign debt default ever). While most of the country’s creditors at the time accepted Argentina’s plan to restructure its debt, a few didn’t – and they’ve been hauling it through the courts ever since.

In November 2012, a New York judge made a ruling (which was then upheld earlier this year) that not paying them back is illegal – which means a $539m interest payment due to be paid to creditors on its performing bonds yesterday was against the rules, unless it paid the holdouts the $1.3bn it owes them, too. So the $539m payment wasn’t made, even though it was all ready to go, and the country went into ‘selective default’.

Basically, the country is between a rock and a hard place: on the one hand, there are the holdouts demanding their cash. On the other is a ‘Rights Upon Future Offers’ (RUFO) clause in its restructuring agreement, which basically states that all creditors are equal, ie. it isn’t allowed to pay the holdouts more than it pays its other bondholders.

You can see why, at the end of June, it took out a SHOUTY AD in the FT to explain why the US is WHIMSICAL AND ABSURD and WRONG and UNFAIR.

So what’s next? Last time the country defaulted, its government’s access to international borrowing was all but eliminated, and that’s been the situation ever since, so the government won’t see much of a change. Institutions and businesses are likely to be the ones to take a hit, as the cost of borrowing on international markets rises. Which, in turn, could push up inflation and make the recession in the country even worse. Good times.

At the end of this year, the RUFO clause expires, which (if this impasse keeps going for that long) would allow Argentina to settle with the holdouts. But the plan is for it not to last until then. There are a number of ways the country could get out of this mess – negotiating with the holdouts (some of whom have suggested they may be willing to settle), a complicated arrangement whereby it pays the restructured bondholders through a private bank, etc etc

Given its current economic state (it slipped into recession in the first quarter of this year, following disappointing 3% growth last year), waiting until the end of the year isn’t ideal.

As Daniel Pollack, the mediator between Argentina and the holdouts, pointed out, ‘default cannot be allowed to lapse into a permanent condition or… Argentina and the bondholders, both exchange and holdouts, will suffer increasingly grievous harm, and the ordinary Argentine citizen will be the real and ultimate victim’. That scenario cannot be allowed to play out.

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