Argentina defaulted for the second time in 12 years after hopes for a midnight deal with holdout creditors were dashed, setting up stock and bond prices for declines yesterday and raising chances a recession could worsen this year.
After a long legal battle with hedge funds that rejected Argentina’s debt restructuring following its 2002 default, Latin America’s third-biggest economy failed to strike a deal in time to meet a midnight deadline for a coupon payment on exchange bonds.
Even a short default will raise companies’ borrowing costs, pile more pressure on the peso, drain dwindling foreign reserves and fuel one of the world’s highest inflation rates.
“It is going to complicate life for businesses like YPF which were going to look externally for financing,” said Camilo Tiscornia, a former governor of Argentina’s central bank. State-controlled energy company YPF needs funds to develop Argentina’s huge Vaca Muerta shale formation.
Argentina had sought in vain to win a last-minute suspension of a ruling by US District Judge Thomas Griesa in New York to pay holdouts $1.33 billion plus interest. He ruled Argentina could not service its exchange debt unless it paid holdouts at the same time.
A proposal for Argentina banks to buy out the hedge funds’ non-performing debt also fell through, sources told Reuters.
“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.
As dire as it is, the situation is a far cry from the mayhem following the country’s economic crash in 2000-2001 when the economy collapsed around a bankrupt government. Millions of Argentines lost their jobs.
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.
Buenos Aires had argued that agreeing to the hedge funds’ demands to pay them in full would break a clause barring it from offering better terms than those who accepted steep writedowns in the 2005 and2010 swaps.
However, that clause expires on December 31, after which the government would be able reach a deal with the funds. Many investors and economists still hope for a separate solution before then between the holdouts and private parties.
“Our base case is that a default would be cleared by January 2015,” said Alberto Bernal, a partner at Miami-based Bulltick Capital Markets. He projected that a default would cause the economy to shrink 2 per cent this year compared with a previous market consensus for a 1 per cent contraction.
Failure to strike a deal will not cause financial turmoil abroad because Argentina has been isolated from global credit markets since its 2002 default on $100 billion, but domestic markets that had rallied on hopes of a deal in recent days will probably reverse course.
“The correction will depend on perceptions of how long the default will take to solve,” said Roca.