Argentina, Creditors Fail to Reach Deal
Country is ‘Imminently’ in Default, Mediator Says, as S&P Downgrades Rating
TAOS TURNER and
Updated July 30, 2014 7:57 p.m. ET
Talks aimed at a last-minute settlement between Argentina and holdout creditors collapsed late Wednesday, and a court-appointed mediator said the country would "imminently" be in default.
At a news conference after talks with the mediator ended, Argentine Economy Minister Axel Kicillof, who had led the country’s delegation to New York, said "we won´t sign an agreement that would compromise Argentina´s future." A spokeswoman later said negotiations would continue, without giving a timetable.
The likely default would be Argentina’s second in 13 years. Analysts said the setback would rock Argentine markets Thursday, as the country’s stocks and bonds had rallied this week on hopes that the two sides would reach a deal and avert default.
The development is the latest twist in a yearslong battle between Argentina and a small group of hedge funds demanding full payment for bonds the country defaulted on in 2001. Argentina has exhausted its legal options after the U.S. Supreme Court declined last month to hear its appeal of a ruling requiring that the holdouts get paid.
Wednesday marked the end of a 30-day grace period for Argentina to make a $539 million interest payment to the holders of the country’s restructured bonds that was due on June 30. Unlike in 2001, Argentina’s economy isn’t in crisis, though it is seen as vulnerable. However, a ruling by U.S. District Judge Thomas Griesa prevents Argentina from paying restructured bondholders until the holdouts are compensated.
"Default is not a mere ‘technical’ condition, but rather a real and painful event that will hurt real people," said court-appointed mediator Daniel Pollack in a statement late Wednesday. He added, "The full consequences of default are not predictable, but they certainly are not positive."
Earlier Wednesday, Standard & Poor’s Ratings Services declared Argentina in default on some of its bonds.
A default could shave as much as one percentage point off growth this year, causing an economy already mired in recession to shrink further, said Martin Redrado, former governor of Argentina’s central bank.
Argentina’s economy minister, Axel Kicillof, speaks to the media after leaving negotiations Tuesday in New York. WSJ’s Matthew Cowley explains Argentina’s dispute with creditors and the long-standing battle that stems from the country’s default in 2001. (Photo: Getty Images)
Analysts said it also would fuel inflation, which some economists say already totals 40%, and deepen the country’s recession. It could roil the country’s financial markets, ending a period of relative calm in the peso’s exchange rate and Argentine bond prices. Argentina’s bonds had soared to multiyear highs before the S&P announcement, which came after markets closed. Investors said they were encouraged by marathon talks on Tuesday and Wednesday between Argentine officials and a court-appointed mediator, as well as a proposal by Argentine banks to pay the holdout creditors.
Argentine officials left Mr. Pollack’s offices in New York Wednesday evening after six hours. The talks followed a 12-hour negotiation session on Tuesday where Argentine officials and the holdouts met face to face for the first time.
Mr. Kicillof, the economy minister, said a private-sector solution was a possibility, apparently referring to a proposal by a group of Argentine banks to offer a $250 million guarantee to the holdouts. The idea is to give the hedge funds a financial incentive to ask Judge Griesa to suspend his ruling until the end of the year and allow payment of holders of restructured bonds.
Argentina’s economy minister, Axel Kicillof, arrives Wednesday morning at the office of the debt-dispute mediator in New York. Agence France-Presse/Getty Images
Argentina’s Debt Standoff
- Argentina’s Long History of Economic Booms and Busts
- If Argentina Defaults, Then What?
- Banks to Pitch Deal to Hedge Funds in Bid to Avert Default
- Owners of Credit-Default Swaps Face Likely Wait
- World Weighs Fallout of Argentina Case
- Argentine Bond Standoff Puts U.S. Judge in Focus
- Meet the Mediator: Daniel Pollack
- Mix of Money and Politics Stirs Intrigue Around Kirchner
- Default Drama Nears Critical Stage (July 27, 2014)
- U.S. Judge Says Argentina Can’t Pay Some Bondholders (June 27)
- Supreme Court Sides With Holdout Creditors in Argentina Debt Case (June 16)
- 5 Things to Know: Argentina, Creditors and the Supreme Court
- Timeline: Argentina vs. Bondholders
There are many investors who have actually bet on an Argentine default through so-called credit default swaps, but it could be days before those investors find out whether they can collect on their bets.
Decisions about CDS payouts are made by a panel convened by the International Swaps and Derivatives Association, a financial trade group. There are $20.7 billion of CDS outstanding on Argentine government debt, according to Depository Trust & Clearing Corp.
The immediate impact to debt markets outside Argentina is expected to be limited. Argentina has been relatively isolated from global financial markets since its default in 2001, and the country’s legal battles with its creditors have dragged on in U.S. courts for years. When Argentina defaulted in 2001, the country’s bonds made up 20% of J.P. Morgan’s widely followed emerging-market debt index. Now, they are only 1.3% of the index, signaling little chance that another default would rattle the global economy.
"I don’t think this is going to have much repercussion outside of Argentina," said Clyde Wardle, a senior currency strategist with HSBC. "It doesn’t seem like external markets have been affected up to this point."
From the Archives
However, the case has raised questions about the power of U.S. courts to adjudicate cases involving sovereign nations and their creditors. The concerns stem from a controversial 2012 ruling made by Judge Griesa, who said Argentina is not allowed to pay its restructured bondholders unless it also pays its holdouts. Lawyers said the ruling marked the first time a U.S. judge had issued such an injunction on the so-called "pari passu" clause, which states that all bondholders must be treated equally.
The U.S. government has called Judge Griesa’s ruling "impermissibly broad" and said it could undermine U.S. foreign relations. The International Monetary Fund and other organizations warned that Judge Griesa’s ruling could make it easier for a handful of creditors to disrupt other debt restructurings. "There is a cost to the world," IMF Chief Economist Olivier Blanchard said last week.
Even if Argentina reaches a deal with holdouts, it likely won’t be enough on its own to right the country’s finances, said Roberto Sifon-Arevalo, head of the Latin America sovereign group at Standard & Poor’s.
Protesters in Argentina hold a mock vulture as they demonstrate against holdout investors locked in a legal battle with the country. Reuters
A deal "would definitely be a good thing. I don’t think that it would automatically be a solution, or a dramatic game-changer. It will be a very important factor though," he said. "The macroeconomic environment in the country has deteriorated significantly. It’s weak and getting weaker. This situation certainly does not help."
Argentina’s legal battle with these holdout creditors have dragged on for nearly a decade, one of many lawsuits filed against the country after it defaulted on nearly $100 billion in debt in 2001.
Still, the idea of default isn’t much of a concern for many Argentines, who have lived through much greater crises over the decades and who are adept at adapting to financial and economic setbacks.
"We talk about this as if it’s something normal. I’m not losing any sleep over it," said Juan Chamale, 36, who works at a Kodak store in downtown Buenos Aires. "We’re very used to this kind of thing and have learned to take it in stride."
—Dan Strumpf, Ken Parks and Katy Burne contributed to this article.
Write to Nicole Hong at nicole.hong, Taos Turner at taos.turnerand Matt Day at matt.day