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September 30, 2022

Negotiations failed to hedge funds: Argentina is bankrupt

The South American country has about USD 200 billion in foreign-currency debt, a figure that includes USD 30 billion in restructured bonds.

Negotiations between Argentina and its creditors have failed – the government in Buenos Aires is broke. Argentina is insolvent for the second time since 2001.
After frantic last minute talks failed to produce a deal late Wednesday, Standard & Poor’s deemed the country to be in selective default, CNN informs. The change in credit rating is likely to hike Argentina’s borrowing costs, and put even more pressure on the country’s already-struggling economy.
So-called “vulture fund” investors were demanding a full pay-out of USD1.3 bn on bonds they hold, BBC informs. Argentina has said it cannot afford to do so, and has accused them of using its debt problems to make a big profit.
The crisis stems from a legal battle with a small group of “holdout” creditors that have demanded payment of about USD 1.5 billion on bonds they bought after the USD 144 billion default in 2001. That standoff has blocked payments to other creditors. Economy minister Axel Kicillof met the “holdouts” for the first time in New York this week but said Wednesday that they rejected an offer he made. Argentina has about USD 200 billion in foreign-currency debt, a figure that includes USD 30 billion in restructured bonds, usatoday.com informs.
Now, the country may have to devalue its currency to preserve foreign currency reserves, and that could trigger a dangerous rise in inflation that is already projected to hit 40 percent. The peso has fallen by about 25 percent against the dollar this year.
There was still hope for a deal on Tuesday, ahead of Wednesday’s midnight deadline.
It looked like Argentina’s banks might throw the government a lifeline. The Wall Street Journal reported that they could agree to pay off the “holdout” creditors – NML Capital and Aurelius Management – and wait until next year to be repaid with government bonds. But Daniel Pollack, the court-appointed mediator, issued a statement Wednesday evening that the talks fell apart. He said that “default cannot be allowed to lapse into a permanent condition” and that he would still be available to help the parties reach some kind of resolution.
The drama could hurt holdings in the debt of other emerging market countries, says Alan Skrainka, strategist at Cornerstone Wealth Management. He says Argentina and Venezuela together hold roughly a third of all emerging markets debt.
The investors, also known as “hold-outs”, are US hedge funds that bought debt cheaply after Argentina’s economic crisis. They never agreed to the restructuring accepted by the majority of bond-holders. President Cristina Fernandez de Kirchner (photo) has described as vultures the minority bond-holders – including Aurelius Capital Management and NML Capital. She accuses them of taking advantage of Argentina’s debt problems to make large profits.
How did it come to this?
The crisis has its roots in Argentina’s last default. It reached agreement with 93 percent of creditors to restructure its debt, but 7 percent refused to accept.
The countdown to a new default started in earnest last month when a U.S. judge ruled that if Argentina doesn’t pay the holdouts, it can’t make any more payments to restructured bondholders.
Argentina worried that a deal with the holdouts could trigger billions of dollars in additional claims – money it doesn’t have. The country’s government also insisted it doesn’t have enough time to reach a fair resolution. This is Argentina’s third default in 25 years, according to ratings agency Moody’s. Still, it no longer holds the record for the biggest – that now belongs to Greece after its distressed debt exchange worth USD 273 billion at the height of the eurozone crisis in 2012. Russia’s USD 39 billion default in 1998 is the third largest in history.

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