Argentina heading for debt default
Published 31/07/2014 | 03:29
Talks aimed at averting Argentina's second default in 13 years has ended with bitter recriminations as the South American country said it could not accept a deal with US hedge fund creditors it dismisses as "vultures".
Court-appointed mediator Daniel Pollack said the failure triggered an imminent default that, among other things, would hurt the Argentine economy as well as bondholders who were not part of the dispute.
"The full consequences of default are not predictable, but they are certainly not positive," he said.
A US court ruling previously blocked Argentina from making 539 million dollars (£319m) in interest payments due by midnight yesterday to other bondholders who separately agreed to restructuring plans with the country in 2005 and 2010.
Argentine economy minister Axel Kicillof emerged from the New York meeting with creditors and the mediator with an air of defiance, saying his government could find no middle ground.
"We're not going to sign an agreement that jeopardises the future of all Argentines," he said. "Argentines can remain calm because tomorrow will just be another day and the world will keep on spinning."
There was no immediate comment from the hedge funds, which refused to participate in the debt restructurings and won a US court judgment that they be paid the full value of their bonds plus interest - now estimated at about 1.5 billion dollars (£887m).
Mr Kicillof said the funds refused a compromise offer to settle their claim, although he gave no details of that proposal.
He said the funds would also not agree to a stay of the court order to allow Argentina to make the interest payments by last night's deadline and avert economic uncertainty for investors and citizens of the country, which is struggling with recession, a shortage of dollars and one of the world's highest inflation rates.
Mr Kicillof dismissed a decision by ratings agency Standard & Poor's to downgrade Argentina's foreign currency credit rating to "selective default" because of the missed interest payments.
"Who believes in the ratings agencies? Who thinks they are impartial referees of the financial system?" he said.
Argentine president Cristina Fernandez had long refused to negotiate with the hedge fund creditors, often calling them "vultures" for picking on the carcass of the country's record 100 billion-dollar (£59bn) default in 2001.
The holdouts, led by New York billionaire Paul Singer's NML Capital, spent more than a decade litigating for payment in full rather than agreeing to provide Argentina with debt relief.
They also sent lawyers around the world trying to force Argentina to pay its defaulted debts and were able to get a court in Ghana to temporarily seize an Argentine naval training ship. The threat of seizures forced Ms Fernandez to stop using her presidential plane and instead fly on private jets.
Restoring Argentina's sense of pride and sovereignty after the 2001-2002 economic collapse has been a central goal of Ms Fernandez and her predecessor and late husband, Nestor Kirchner. The couple nationalised the pension system, kept energy cheap through subsidies and dug deep into the treasury to redirect revenue to the poor through handouts.
Argentina has also made efforts to return to global credit markets that have shunned it since the default. The government paid its debt to the International Monetary Fund and agreed in May with the Paris Club of creditor nations on a plan to begin repaying 9.7 billion dollars (£5.7bn) in debts unpaid since 2001.
It also agreed to a five billion-dollar (£2.9bn) settlement with Grupo Repsol after seizing the Spanish company's controlling stake in Argentina's YPF oil company.
Analysts say a new default would undermine all of these efforts.
"This is unexpected; an agreement seemed imminent," said Ramiro Castineira of Buenos Aires-based consultancy Econometrica.
"Argentina would have benefited more from complying with the court order in order to get financing for Vaca Muerta," he added, referring to an Argentine region that has one of the world's largest deposits of shale oil and gas.
Only a few international companies have made commitments to help develop the fields as many fear the government's interventionist energy policies. The government has also struggled to get investors because it can't borrow on the global credit market.
Prices for Argentine bonds had surged to their highest level in more than three years on the possibility that Argentina would reach a deal with the hold-out creditors. Argentina's Merval stock index also climbed more than 6.5% in midday trade on a likely deal.
Optimism had been buoyed by reports yesterday that representatives of Argentina's private banks association, ADEBA, were poised to offer to buy out the debt owed to the hedge funds. In return, the reports said, the US court would let Argentina make the interest payments due before the midnight deadline and avoid default.
The deal failed to materialise.
"It is an unfortunate situation which is pushing the country into another default. As defaults go, we all know when we get into one but it is very unclear when and how to get out of it," said Alberto Ramos, Latin America analyst at Goldman Sachs.
"We just added another layer of risk and uncertainty to a macro economy that was already struggling. This puts us on a path of unpredictable economic and financial consequences. But nothing will last forever. At some point the parts involved will hopefully sort this out."