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Don't Cry to Me Argentina
Argentina Defaults—Sort Of

After last minute negotiations broke down last night, Argentina has defaulted. The AP reports:

The collapse of talks with U.S. creditors sent Argentina into its second debt default in 13 years and raised questions about what comes next for financial markets and the South American nation’s staggering economy.

A midnight Wednesday deadline to reach a deal with holdout bondholders came and went with Argentine Economy Minister Axel Kicillof holding firm to his government’s position that it could not accept a deal with U.S. hedge fund creditors it dismisses as “vultures.” Kicillof said the funds refused a compromise offer in talks that ended several hours earlier, although he gave no details of that proposal.

Argentina’s predicament stems from two US Supreme Court rulings this spring, in which the court ruled that Argentina had to pay holdout creditors from its 2001 default, the so-called “vultures”, if at any point it paid its other creditors.

Even after this ruling, Argentina insisted that it could not pay the holdouts without triggering a cascade of other claims. It deposited enough money to pay its current bondholders in a New York bank, but as it refused to pay the holdouts, a US judge blocked the payments from going through. As a midnight deadline approached yesterday, a deal appeared possible in which a consortium of Argentinian banks would buy the debt off of the holdouts. This proved impossible to make work in time, and the deadline passed. Argentina defaulted.

For those of us who’ve been following the bizarre reactions of the Argentinian government throughout the saga, its reaction last night was satisfyingly crazy:

Buenos Aires was insisting on Thursday that it was not in default, with cabinet chief Jorge Capitanich urging holders of its restructured debt to demand their money from the US judge who has blocked interest payments.

“The credit rating agencies, the financial agents and opinionators who are trying to say that Argentina is in a supposed technical default are playing an absurd hoax that is aimed at destroying the restructuring process of Argentina debt,” he said.

But Argentina might be crazy like a fox. The markets are for now at least sort-of buying their claim that this default is different, since rather than running out of money, they were simply prevented from paying it by the courts. There has not been the kind of panic that one would expect from a full-blown default — yet. S&P has placed the country in “selective default”, indicating that it is paying some of its bills but not others by choice. But it appears that the real test is yet to come:

The immediate focus was on whether a group of big banks and funds overseen by the International Swaps and Derivatives Association would declare the situation a “credit event”.

Any such ruling would set off a series of insurance payments and give most of Argentina’s current bondholders the right to demand their money back immediately. The deadline is August 4, according to analysts.

Whether a true crisis can be avoided, then, depends on what Argentina does next. If a deal can be struck soon, the markets, in their infinite practicality, seem ready to move on.

Whether that happens will depend on Argentinian President Cristina Fernandez de Kirchner. Politically, the once-popular president is down to only bedrock support, with approval ratings hovering around 20-30%. This has proven enough to let her run the country — but it makes it hard for her to further alienate any of her leftist base.

The combination of insulation from the consequences of default — a privelege her people do not enjoy — and a lack of political maneuvering room may make it more likely that CFK may not be willing or able to strike a deal.

The Argentinian peso and markets already appear poised to suffer, and should the crisis prove permanent, the people of Argentina would surely feel the pain. It would be outrageous, but too sadly predictable in light of Argentina’s history, if the leaders of this naturally-rich country allowed such a calamity to unfold.

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  • Breif2

    “hedge fund creditors it dismisses as ‘vultures.'”

    So they admit that they are a financial corpse?

  • FriendlyGoat

    “But Argentina might be crazy like a fox.” We don’t know the outcome yet.

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