Argentina: Technical default may be in the cards for Argentina
July 10, 2014
The clock is ticking for Argentina as the likelihood of a technical default looms on the horizon. If a solution is not found by the end of July, Argentina would enter into a new default. On 27 June, United States District Judge Thomas Griesa blocked the Bank of New York Mellon—the trustee for Argentina’s debt obligations—from paying USD 539 million to restructured bondholders. The payment was originally due on 30 June, but Judge Griesa ruled that the country had to fulfill payment to both regular creditors and the holdouts (bondholders who refused to participate in the 2005 and the 2010 debt restructuring processes) at the same time. Argentina is edging closer to its second technical default in 13 years, yet this can still be avoided if Argentina reaches an agreement with holdout investors during a 30-day grace period ending on 30 July.
In order to tackle the dispute with the holdouts, on 7 July, a negotiating team led by Argentina’s Economy Minister Axel Kicillof went to New York to meet with attorney Daniel Pollack, the Special Master appointed by Judge Griesa to mediate between Argentina and the holdouts. Kicillof reiterated that the country is unable to pay the USD 1.33 billion to the holdouts and that a stay of the court order is necessary to find a solution for all creditors. Conversely, the holdouts argued that the government first should negotiate with them and then seek a stay.
The Argentinian government refused to pay the holdouts in full because it argues that this would trigger further payments to other creditors. According to a clause included in the debt swap deals that expires on 31 December, if the government decides to “voluntarily” reach an agreement with the holdouts then all bondholders who participated in the bond restructuring could benefit from the better terms offered to the holdouts, thus increasing the total amount the country must repay.
Judge Griesa’s ruling to force Argentina to pay both regular creditors and the holdouts prompted other individual creditors that did not accept the swap deals to claim the much smaller amounts that they are owed. Nevertheless, the Argentinian government estimates that these smaller claims amount to around USD 15 million.
The consequences of the conflict between the holdouts and the Argentinian government could spread to the global commodity market. Farmers in Argentina stated that they would hoard soybeans in the second half of the year if the government and the holdouts do not cut a deal. This would reduce global supply and push up prices in the international markets. Farmers tend to hoard soybeans as a hedge against inflation and use grains as a unit of saving.
In recent months, Argentina made bold efforts to regain access to international capital markets by reaching a deal with the Paris Club to clear debt arrears and settling an agreement with Spanish firm Repsol over an expropriation in 2012. However, the ongoing dispute with the holdouts could derail the country’s plan to attract foreign investors. In addition, the decision to comply with the holdouts—which could potentially trigger further payments—could add more pressure on the country’s already strained external position. 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.