Argentina: Argentina enters into second default in 13 years, solution unclear
August 6, 2014
On 30 July, Argentina defaulted on its debt for the second time in 13 years, as the country could not settle a deal with creditors who rejected participation in the 2005 and 2010 debt swap. The default is a step backward to restore Argentina’s credibility among international investors and it may further weigh on the country’s already sluggish economic growth. After blocking USD 539 million in interest payments to regular bondholders on 27 June, Judge Thomas Griesa conceded a 30-day grace period to the parties to reach an agreement. The payment originally was due on 30 June, but Judge Griesa ruled that the country had to fulfill payment to both regular creditors and the holdouts at the same time. Argentina owes the holdouts about USD 1.5 billion.
In a press conference in New York on 30 July, Argentina’s Economy Minister Axel Kicillof stated that the government offered the holdouts the same conditions that it had agreed with regular bondholders. According to Kicillof, Argentina cannot pay the holdouts in full because it would trigger further payments to other creditors under the Rights Upon Future Offers (RUFO) clause. According to the RUFO clause, which expires on 31 December, if the government decides “voluntarily” to reach an agreement with the holdouts, then all creditors who participated in the bond restructuring could benefit from the better terms offered to the holdouts. In addition, Kicillof stated that Argentina should reach an agreement with all bondholders who did not participate in debt swaps, not only with the litigants.
While Argentina missed bond payments, credit rating agencies downgraded the country’s sovereign credit rating to only selective or restricted default, as all bonds issued under Argentine and European laws were not affected. Nevertheless, on 1 August, the International Swaps and Derivatives Association declared that Argentina entered into default, thus triggering USD 1.0 billion in payouts on credit-default swaps. Meanwhile, the government claims that the country is not in default since Argentina can meet its obligations; it transferred the funds in a timely manner to a trustee bank to pay the bondholders before they were blocked and, on 28 July, it paid USD 642 billion to the Paris Club.
In recent days, speculation mounted that some banks, both local and international, have started negotiations with the holdouts in order to resolve Argentina’s debt impasse. According to local sources, these banks would buy the defaulted bonds, thus allowing Argentina to exit default. That said, analysts reckon that Argentina and the holdouts could wait until next year to resolve this crisis, once the RUFO clause expires. In any event, Argentina’s default would trigger harsh consequences for the economy. As Gustavo Canonero, Regional Head Economist for Latin America at Deutsche Bank points out:
“Default will mean further reduction in external financing for Argentina and in the best case scenario the very likely depletion of USD10bn between now and December from the pool of international reserves at the Central Bank (currently at USD29bn, of which USD20bn are net, representing less than 3 months of imports -gs and ss.) Declining international reserves should increase pressure on the FX market, accelerating inflation expectations, further reducing real income, and increasing precautionary motives not to spent [sic]; all together further deepening the current economic recession. This could create a very fragile equilibrium, critically dependent on the authorities’ ability and willingness to find a resolution to the holdout problem.”
The current situation derails Argentina’s efforts to regain access to international capital markets, from which it has been locked out since the country defaulted in 2001 on a record USD 100 billion. Argentina recovered quickly from the crisis mainly due the global commodity boom, but the country is now struggling with skyrocketing inflation, shrinking reserves, tepid economic growth and cooling demand from Brazil (Argentina’s largest trade partner). Against this backdrop, the country needs to attract foreign investment to stimulate the economy and finance development projects, particularly in its shale gas industry.
Foreign-exchange reserves, which are partially used to pay creditors, currently stand at USD 29.3 billion. This is just a fraction of the USD 52.6-billion peak recorded in January 2011.