Argentina locked in a high-stakes stand-off with bondholders

The latest debt crisis is a hangover from the last default 12 years ago

Argentina’s president Cristina Fernandez de Kirchner. REUTERS/Ueslei Marcelino

Argentina’s president Cristina Fernandez de Kirchner. REUTERS/Ueslei Marcelino

Sat, Jul 26, 2014, 01:01

Just 12 years after declaring history’s largest debt default, serial offender Argentina finds itself at risk of a repeat with potentially disastrous results for its fragile economy.

The government in Buenos Aires is locked in a high-stakes stand-off with holders of bonds it defaulted on in 2001. If no resolution is reached by next Wednesday, a new default looks inevitable. At the time of writing, talks were ongoing to find an 11th-hour solution.

Argentina’s latest debt crisis is a hangover from the last one and is rooted in the country’s flawed efforts to renegotiate with bondholders after the 2001 default.

In 2005 Argentina imposed a swingeing cut on investors when swapping defaulted for restructured bonds. Many bondholders refused to accept the terms, which implied a 65 per cent loss on investment, and have turned to the courts in the US, where the paper was originally issued.

There the bondholders have won a ruling from New York district court judge Thomas Griesa, which prevents Argentina from making interest payments on the restructured bonds unless its pays the so-called holdouts in full.

Argentina says it will not do so, arguing that the 2005 restructuring deal, which it reopened in 2010, was eventually accepted by more than 90 per cent of bondholders and it will not bow to what it labels vulture funds who bought up the defaulted debt at pennies on the dollar and are looking to make a large profit.

But as the original bonds contained no collective action clause, the holdouts, led by hedge fund billionaire Paul Singer, say they are not obliged to abide by the decision of the majority who accepted the restructuring deal, and are determined to push for better terms.

Deadline looming

With an interest payment deadline looming on Wednesday, Argentina says it will deposit the money due to bondholders that accepted the restructuring deal in a New York bank. But Griesa has ruled that if there is no cash for the holdouts the bank cannot distribute the money.

Analysts say this would amount to a technical default, although the government disputes this. “Argentina will not enter default for a simple and elemental reason: default is for those who don’t pay and Argentina is paying,” said Argentinian president Cristina Kirchner.

A technical default will further delay efforts to return to international capital markets, closed to Argentina since the 2001 default, at a time when the government is desperate for funds to cover a fiscal deficit that is undermining confidence in the local peso. A new default could also see commercial credit lines to Argentine companies shut off, which could deepen the current recession and further weaken the peso.

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