Argentina’s bond and stock markets and peso currency dropped on Thursday after Latin America’s No. 3 economy defaulted for the second time in 12 years following the collapse of last-ditch talks with holdout creditors.
The default came after Argentina failed to strike a deal with lead holdout investors NML Capital Ltd, an affiliate of Elliott Management Corp and Aurelius Capital Management, in time for a midnight Wednesday EDT (5 am BST) payment deadline.
“Those who expect us to sign any old thing, threatening us that the world will come to an end otherwise, should not count on me,” Argentine President Cristina Fernandez said in her first comments since the default.
The government maintains it has not defaulted because it made a required interest payment on one of its bonds due 2033, but US District Judge Thomas Griesa in Manhattan blocked that deposit in June, saying it violated his ruling.
At that time, Griesa deemed the $539 million deposit with the Bank of New York Mellon, Argentina’s trustee bank, was illegal because it did not include a concurrent court-ordered payment of $1.33 billion plus accrued interest to the holdout investors.
The situation that generated the default was a lawsuit, not the failure of the country to transfer the proceeds to pay existing debt
Griesa scheduled a new hearing in New York yesterday to discuss the default.
Buenos Aires argues that agreeing to the hedge funds’ demands to pay them in full would break a clause barring it from offering better terms to them than to those who accepted to steep write-downs in the 2005 and 2010 swaps.
Both Argentine Economy Minister Axel Kicillof and Fernandez warned that the country could bring more lawsuits to challenge the contention that it is in default.
Bondholders who participated in the two prior restructurings of the 2002 default now have to decide whether to seek immediate full payment of principal and interest on their restructured debt, a process known as acceleration.
This process requires 25 per cent of the bondholders on each of 16 bonds issued in the 2005 and 2010 restructurings to ask BNY Mellon for a formal decision on default. The bank has 60 days to decide.
“I don’t think at the moment there is a clear answer to whether bondholders will accelerate a deal. It’s probably not something most bondholders would like to see,” said Olivier De Timmerman, fixed income fund manager at KBC Asset Management in Luxembourg.
Another formal declaration of a default is also possible from a committee of buy- and-sell side investment firms organised by the International Swaps and Derivatives Association (ISDA). They will decide if a side-bet made on insuring Argentine government debt is payable.
Argentina’s default is generally not seen unleashing financial turmoil abroad because it has been isolated from global credit markets since its 2002 default on about $100 billion of debt. But the cost of insurance on the South American country’s sovereign debt surged on Thursday. It has foreign currency restructured debt worth about $35 billion, including $8 billion under local law, while its foreign exchange reserves stand at $29 billion. Buenos Aires has dubbed holdout investors “vultures” for picking over the carcass of their broken economy.
Even a short-term default would raise local companies’ borrowing costs, pile more pressure on the peso, drain dwindling foreign reserves and fuel one of the world’s highest inflation rates.
Asset prices were down sharply but market participants said they still expected either the government or third parties to reach a deal eventually with the holdout investors.
As to whether Argentina had suffered a so-called credit event, the ISDA said it had received its first request regarding the issue, according to its website.
Swiss bank UBS asked the 15-member ISDA-facilitated Determinations Committee (DC) to consider whether a “failure to pay” credit event had occurred. Its ruling applies only to those investors who purchased Argentine credit default swaps (CDS).
The committee is independent of ISDA and was due to convene on a conference call yesterday, although a spokeswoman said no time frame had been set for a vote on whether to declare a credit event had occurred.
If a super-majority of 12 member firms on the DC vote that a credit event has taken place then a payout process would start for holders of these CDS contracts.
UBS cited a missed deadline to deliver interest payments to creditors holding the restructured debt from the 2002 default, and Credit Suisse has said CDS payments were “likely to be triggered”.
“It is still not clear whether the credit default swap of the country will be triggered. The situation that generated the default was a lawsuit, not the failure of the country to transfer the proceeds to pay existing debt,” said Emiliano Surballe, fixed-income analyst at Bank Julius Baer.
Credit rating agencies downgraded Argentina as a result of its missed payment to a half-step before declaring absolute default. Fitch Ratings said on Thursday Argentina was in Restricted Default and Standard & Poor’s on Wednesday pushed the country to Selective Default.
Moody’s late on Thursday changed to negative its outlook on Argentina’s long-term issuer rating, saying the default could increase pressure on the country’s official foreign exchange reserves at a time when the economy is stagnating.
Moody’s said the negative outlook also took into account the uncertainty over how the current legal impasse will be resolved. It said if ultimate losses for bondholders were significantly greater than 20 per cent, that would prompt a ratings cut from the current (P)Caa2 rating.
Argentine banks had scrambled to put together a proposal to buy out the non-performing debt held by the holdouts and avert the default. That attempt at a deal collapsed in the final hours.
Some Argentine newspapers reported that JPMorgan Chase & Co and other banks might be involved in a private-sector deal with the holdouts to help resolve the default. A JPMorgan spokesman said the US investment bank had “no comment” on the reports.
Aurelius said it had received no proposals on a private-sector debt purchase “worthy of serious consideration.”
In Buenos Aires, nerves were raw. Argentine Cabinet chief Jorge Capitanich urged holders of Argentina’s exchange bonds to demand their money from Judge Griesa. Capitanich also lashed out at US-court appointed mediator Daniel Pollack, calling him “incompetent”.
Even so, some holders of Argentine debt were optimistic the government would seek a resolution.
“It’s probably going to be more a soft-default scenario where prices will slide a bit. There is confidence in what the government is going to do,” said Rune Hejarskov, senior portfolio manager at Jyske Invest, which holds Argentine debt.
The relative calm surrounding Argentina’s current debt crisis is a sharp contrast from the mayhem in 2001-2002 when the economy collapsed around a bankrupt government and millions of Argentines lost their jobs. Argentina has a population of 40 million.
This time the government is solvent. How much pain the default inflicts on Argentina, which is already in recession, will depend on how swiftly the government can extricate itself from its obligations.
“This is a very particular default, there is no solvency problem, so everything depends on how quickly it is solved,” said analyst Mauro Roca of Goldman Sachs.