Tuesday, July 29, 2014

Argentina on the Edge of Massive Debt Default (Updated)

Argentina is very close to defaulting on its debt to foreign creditors unless a deal is reached some time today.
Representatives for the Argentine government and creditors are currently meeting in New York City in the hope of averting what would be the country’s second default in 13 years. The envoys are together with a mediator assigned by Thomas Griesa, a U.S. judge who ordered that the Argentine government pay holdouts some $1.5 billion in unpaid debts including interest.  The purchased Argentine bonds for a low price and rejected the government's restructuring offers after its record $100 billion default in 2001.

Up until today, negotiations between both sides have been sporadic and yielded very little progress. Argentine President Cristina Fernandez is at the Mercosur trading bloc summit in Venezuela trying to gain support against the creditors that she deemed as “vulture funds” for spending years litigating for payment in full.  Fernandez and at least one of the holdouts have separately pushed for a delay on the repayment but Griesa has so far refused.

Update (July 30, 2014): Despite hours of last-minute negotiations on Tuesday between creditors and the Argentine government, the country will likely fall into default.  

"There was a frank exchange of views and concerns," said appointed mediator Daniel A. Pollack though he admitted that it was unclear if both sides will meet again on Wednesday.

In what may be an optimistic sign prior to today’s meeting, Griesa permitted the one-time payment of some dollar-denominated bonds since they were issued in a settlement to Spanish oil firm Repsol.  Furthermore, the Argentine Economy Ministry said yesterday that the government had made a $642 million payment on $9.7 billion in debt owed to the Paris Club of creditor nations.

“Argentina will not fall into default and our loans with China will not collapse,” insisted Interior Minister Florencio Randazzo this morning.  Yet worries over a failure to reach an agreement spooked investors and led the Buenos Aires stock exchange index to drop by 1% at the close of trading on Monday.  A possible default could lead to bondholders claiming an amount equal to Argentina’s foreign currency reserves:
If the overdue interest on Argentina’s dollar-denominated securities due 2033 isn’t paid by July 30, provisions in bond indentures known as cross-default clauses would allow the nation’s other debt holders to also demand their money back immediately. The amount ($29 billion) corresponds to Argentina’s debt issued in foreign currencies and governed by international laws…
“It would mean that Argentina is in default on most all of its debt and presumably everybody would be in the same boat,” Anna Gelpern, a fellow at the Peterson Institute for International Economics and a law professor at Georgetown University, said in a telephone interview.
According to economist Miguel Ángel Boggiano, Argentina has either defaulted or had its debt restructured on seven occasions in the country’s history. Even if it hits its eighth default tomorrow, its still less than the defaults/debt restructuring of other Latin American states like Venezuela, Ecuador (both with eleven), Brazil (ten) and Mexico (nine).

Though there’s never an ideal time for a debt default, such an event could be costly to a Fernandez administration that has recently come under fire.  Last month, Vice President Amado Boudou was charged with bribery while the Argentine economy officially slid into recession.  The exploits of Los Albicelestes at the World Cup provided what may have been welcome distraction yet the brief kidnapping of the father of soccer star Carlos Tevez today has highlighted Argentina’s crime problems.

Video Source – YouTube user DW (English)

Online Sources including Update – The New York Times; USA TODAY; BBC Mundo; La Nacion; Reuters; Clarin; MercoPress; Bloomberg; BBC News; The Huffington Post

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