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Thu July 31, 2014
The Two-Way

Argentina's Default: 5 Headlines That Tell The Story

Originally published on Thu July 31, 2014 8:45 am

Yesterday in New York, representatives from Argentina and some of its creditors emerged from negotiations to announce that they had failed.

As NPR's Jim Zarroli reports, this meant that the country had fallen into default for a second time in more than 12 years. The repercussions of the default are unpredictable, but it could mean that the country is shut out of the international debt markets, perhaps pushing interest rates and inflation higher.

With that here are five headlines that tell the story of Argentina's default:

-- "S&P Cuts Argentina To 'Selective Default' Rating" (Barron's):

Even before Argentina technically missed its first payment to bond holders, the credit ratings agency Standard & Poor's issued a rating that means the country had defaulted on "some of its foreign currency obligations."

A glimmer of good news in S&P's move: it didn't dive the rating of the country's currency further into junk status because "the potential disruptions to interest payments on Argentina's external debt are not likely to further erode its ability to service its debt issued in its local currency and under its local law."

It's important to note that this all started with an order from a U.S. court. Back in 2001, Argentina also defaulted on some of its debt. Out of that mess, some bond holders accepted a restructuring agreement, in which Argentina agreed to pay back a portion of what it owed them. A U.S. court, however, ruled that Argentina could not pay those bond holders without concurrently paying other bond holders who did not come to an agreement with the country in 2001.

-- "In Hedge Fund, Argentina Finds Relentless Foe" (New York Times):

Speaking of the so called "holdouts," the New York Times talks about the hedge fund of Paul E. Singer, which has a staff of 300, but has "managed to force Argentina, a nation of 41 million people, into a position where it now has to contemplate a humbling surrender."

The piece is worth a read. Here's a bit from it:

"As a hedge fund, Elliott's pursuit of Argentina is motivated by a desire to make money. Having bought its Argentine bonds for well below their original value, the firm stands to make a killing if Argentina pays the bonds in full. Legal filings indicate that the face value of its Argentine government bonds was around $170 million, but the firm most likely acquired many of them for much less than that. Elliott and other investors are now seeking more than $1.5 billion, which includes years of unpaid interest.

"Still, there is also something of a crusade about the battle that reveals the worldview of Mr. Singer, who is 69. A Republican donor with libertarian leanings, he has spoken out when he thinks that governments and companies have damaged the rights of creditors.

"'He doesn't get into fights for the sake of fighting. He believes deeply in the rule of law and that free markets and free societies depend on enforcing it,' said a fellow hedge fund manager, Daniel S. Loeb."

-- "What Are the Ripple Effects if Argentina Defaults?" (Bloomberg):

So does this accomplish the less liberal fiscal world that Singer may be looking for? Here's a good round table from Bloomberg addressing the issue:

-- "World Weighs Fallout of Argentine Bond Case on Other Indebted Nations" (Wall Street Journal):

The Journal captures the big fear some observers have:

"The International Monetary Fund and others are warning that the legal rulings that forced Buenos Aires' hand could imperil future debt restructurings. Already, they say, the case is driving bond issuers to rewrite their contracts to ensure that a small group of creditors wouldn't be able to hold bond deals hostage.

— "Argentina Is Already Unwelcome In The Debt Markets" (The Guardian):

The Guardian's Heidi Moore tells us why she thinks that's overblown:

"Absolutely nothing is riding on an Argentina's default. The entire conflict is composed of absurdities.

"Here's one: Argentina's president, Cristina Kirchner, maintains that Argentina can't afford to pay the hedge funds. But it pays for the rest of us to be skeptical of that claim: if Argentina can pay some of its bondholders, it can pay all of them. The country owes the holdouts roughly only $1.5bn, a fraction of the $23bn it will pay its other bondholders in a single payment.

"Here's another: Argentina's fight with hedge funds sets no precedents for any other countries. The US will feel no impact, beyond a few investors losing some completely manageable amounts of money on their own. Argentina's mulishness centers around a relatively paltry set of 13-year-old, $1.5bn bonds that were badly negotiated and haven't been imitated by any other country since.

"And another insanity: Argentina is already unwelcome in the debt markets – avoiding your creditors will do that – so a default wouldn't make it any worse. Argentina has been so financially isolated for so long that it has nearly no global weight to throw around."

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