Argentina – The Economic Backdrop To The Default

The Default is a Minor Problem – Argentina’s Real Problem is Something Else Entirely

By now it is well known that Argentina has been declared in default by the major credit rating agencies. This has happened in spite of the Argentine government actually depositing the interest payment intended for those creditors who have grudgingly accepted the post 2001 default restructuring because they thought they had no other choice. After all, they couldn’t very well invade Argentina and sell its government assets. That is the problem with lending to governments: they not only assuredly waste the money they borrow, but when push comes to shove, creditors often find themselves left out in the cold.

However, the so-called “hold-outs” -  a group of investors that didn’t accept the terms of the debt restructuring – have continued to fight the Argentine government in court to get restitution, and have won several cases. At one point, they even had an Argentinian warship confiscated in a Ghanaian port.  The latest court case won by the hold-outs has led to the current impasse and subsequent default.

“Standard & Poor’s declared Argentina in default after the government missed a deadline for paying interest on $13 billion of restructured bonds.

The South American country failed to get the $539 million payment to bondholders after a U.S. judge ruled that the money couldn’t be distributed unless a group of hedge funds holding defaulted debt also got paid. Argentina, in default for the second time in 13 years, has about $200 billion in foreign-currency debt, including $30 billion of restructured bonds, according to S&P.

Argentina and the hedge funds, led by billionaire Paul Singer’s Elliott Management Corp., failed to reach agreement in talks today in New York, according to the court-appointed mediator in the case, Daniel Pollack. In a press conference after the talks ended, Argentine Economy Minister Axel Kicillof described the group of creditors as “vulture funds” and said the country wouldn’t sign an accord under “extortion.”

“The full consequences of default are not predictable, but they certainly are not positive,” Pollack wrote in an e-mailed statement. “Default is not a mere ‘technical’ condition, but rather a real and painful event that will hurt real people.”

Kicillof, speaking at the Argentine consulate in New York, told reporters that the holdouts rebuffed all settlement offers and refused requests for a stay of the court ruling. He said Argentina couldn’t pay the $1.5 billion owed to the hedge funds because doing so would trigger clauses requiring the country to offer similar terms to other bondholders.”