Saturday 27 December 2014

Argentina's race to contain fallout from debt default

Sarah Marsh

Published 01/08/2014 | 02:30

Argentina's Economy Minister Axel Kicillof speaks to the media at a press conference at the Argentine Consulate in New York July 30, 2014. Kicillof on Wednesday said the country offered a group of holdout creditors the same reduced payment terms it has agreed to pay other holders of its restructured bonds, but the holdouts refused the offer. The holdouts, a group of hedge funds that bought the bonds at a steep discount following Argentina's default on $100 billion of debt in 2002, also refused to ask a U.S. court to stay an order the blocks Argentina from paying its other creditors, Kicillof said.        REUTERS/Carlo Allegri (UNITED STATES - Tags: BUSINESS POLITICS)
Argentina's Economy Minister Axel Kicillof speaks to the media at a press conference at the Argentine Consulate in New York July 30, 2014. Kicillof on Wednesday said the country offered a group of holdout creditors the same reduced payment terms it has agreed to pay other holders of its restructured bonds, but the holdouts refused the offer. The holdouts, a group of hedge funds that bought the bonds at a steep discount following Argentina's default on $100 billion of debt in 2002, also refused to ask a U.S. court to stay an order the blocks Argentina from paying its other creditors, Kicillof said. REUTERS/Carlo Allegri (UNITED STATES - Tags: BUSINESS POLITICS)

Argentina defaulted for the second time in 12 years after hopes for a lastminute deal 
with holdout creditors were dashed.

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 yesterday's 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's economy minister Axel Kicillof 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 $1.33bn (€1bn) 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 said.

"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 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 and 2010 swaps.

However, that clause expires on December 31, after which the government would be able to reach a deal with the funds. Many investors and economists still hope for a separate solution between the holdouts and private parties before then.

"Our base case is that a default would be cleared by January 2015," said Alberto Bernal, a partner at Bulltick Capital Markets. He projected that a default would cause the economy to shrink 2pc this year compared with a previous market consensus for a 1pc 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 $100bn, 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 Mr Roca.

The default could get much messier and take longer to clear up if creditors force an "acceleration" for early payment on their bonds. Argentina has foreign currency restructured debt of about $35bn (€26bn) and foreign exchange reserves of $29bn (€22bn).

Ratings agency Standard & Poor's has downgraded the country's long- and short-term foreign currency credit rating to "selective default". (Reuters)

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