Argentina is declared in selective debt default after talks fail

07/31/2014 8:06 AM

08/02/2014 5:25 PM

Standard & Poor’s declared Argentina in selective default Wednesday afternoon after it failed to reach an agreement with American holdout creditors in the final hours of negotiations. It marked Argentina’s second default in 13 years.

Despite the passing of a midnight deadline, both sides were expected to continue talking to resolve the default. Some last-minute maneuvers on Tuesday and Wednesday by Argentina and others outside the lawsuit to avoid default fell through. Many economists expect the default to produce dire financial consequences for Argentina, which is already in a recession.

“Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default,” the court-appointed mediator, Daniel Pollack, said in a statement. “The ordinary Argentine citizen will be the real and ultimate victim.”

A lengthy legal battle and a month of negotiations through Pollack had produced no resolution to the demand by the holdout creditors, led by billionaire Paul Singer and his hedge fund NML Capital, that they be paid in full for the $1.5 billion in Argentine bonds they purchased in 2001.

Although talks on Tuesday night had offered some prospect of an agreement as the two sides spoke face-to-face for the first time, all efforts proved fruitless Wednesday, according to Pollack’s statement.

Argentine Economy Minister Axel Kicillof remained defiant at a news conference after the negotiations ended Wednesday.

“We aren’t going to sign any agreement that would jeopardize the future of Argentines,” Kicillof said, speaking at Argentina’s consulate in New York.

NML put the onus on Argentina for the failure in a statement. “During this process, the Special Master proposed numerous creative solutions, many of which were acceptable to us. Argentina refused to seriously consider any of them, and instead chose to default,” it said.

The Association of Argentine Banks, a group of private banks, voted to offer the holdout creditors $250 million on behalf of the government in exchange for a stay, according to several news reports. A representative of Banco Macro, a member of the association, didn’t reply to an email seeking confirmation. A representative of the association attended the negotiations Wednesday.

Separately, a group that owns euro-denominated Argentine bonds had requested Tuesday that the judge in the case, Thomas Griesa, suspend talks. Griesa denied the motion.

It was Griesa who triggered the possibility of a default when he ruled that Argentina had to pay the holdout creditors in full, then blocked the country’s plan to make a payment June 30 to other creditors who’d agreed to accept a 70 percent discount on the debt they held. Griesa said Argentina had to pay all the creditors at the same time. When Argentina missed the June 30 payment, that started the clock running on a 30-day grace period that ended at midnight Wednesday.

Some outside the lawsuit have disagreed with Griesa’s order. Preet Bharara, the U.S. attorney general in New York, filed a brief in an appeals court in 2012 supporting Argentina, arguing that Griesa misinterpreted the requirement that all bondholders be treated equally.

“He probably did not foresee the full ramifications of his decision,” Anna Gelpern, senior fellow at the Peterson Institute for International Economics and a Georgetown University professor, said of Griesa. “It is possible that in his desire to put pressure on Argentina, he has created consequences that he did not expect, both for his own court room and for Argentina and other market participants.”

The International Monetary Fund also expressed concern over the lawsuit’s consequences.

“One of the implications of this Argentina episode is that there is much more uncertainty as to how we’ll be able to restructure debt for other countries in the future,” Olivier Blanchard, the director of the IMF’s research department, told a new conference last week in Mexico City, according to an IMF transcript.

The battle has been good politically for Argentina President Cristina Fernandez de Kirchner, at least in the short term, said Eugenio Aleman, an Argentine and senior economist at Wells Fargo Securities in Charlotte, N.C.

“A default, in the Argentine nationalistic scheme of things, will be seen as standing up to the vultures,” said Aleman, referring to the term Kirchner calls the holdouts. But, he added, “The benefits will probably be very short-lived because people will then figure out that things are getting worse, and the government will not be able to finance itself.”

The case has ramifications for other countries to resolve restructured debt cases, said Eric LeCompte, the executive director of Jubilee USA Network, a religious financial-restructuring group in Washington that lobbies for poor nations.

For example, Grenada and a Taiwanese bank are in a similar debt lawsuit in New York, and Griesa’s ruling on Argentina will likely affect that outcome, LeCompte said.

“Argentina decided it was better to default than to settle,” said LeCompte Wednesday evening. “Because of the precedent this case sets there are a lot of losers and few winners.”

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