Argentine Bond Insurance Costs Rise on Default Threat

Renewed concerns that Argentina may be edging closer to its
second default
in just over a decade has pushed the country’s debt insurance costs and bond yields higher.

The cost to insure US$10m of Argentina’s sovereign debt for one year rose to $6.6m, the highest since the record US$8.58m set in November, as the long-standing issue of whether the country should pay US$1.33bn to investors on defaulted bonds was heard in the Second Circuit Court of Appeals in New York. On 27 February, Argentina requested that the court set aside a decision by New York federal judge Thomas Griesa last year that barred the country from making payments on its restructured debt unless it set aside additional funds for creditors who didn’t participate in the restructuring.

Argentina has resisted paying defaulted creditors led by US fund Elliott Associates, disparaging them as “vultures”. Judge Reena Raggi aggressively questioned Argentina’s lawyer, Jonathan Blackman, over the consequences should the court rule against the country. His response: “We would not voluntarily obey such an order,” was taken as meaning that Argentina would opt for default instead.

Investors now believe that a default could occur at the end of this month, when Argentina is due to make a US$180m coupon payment on a par bond, if the US court rules against before 31 March. Argentina has pledged to pursue its case in the US Supreme Court if the appeals court verdict goes against it.

Following this week’s hearing, Argentine vice president Amado Boudou said: “It’s not that Argentina won’t pay. Argentina will always pay those who entered into the exchange. What Argentina won’t do is break its own laws.”

Argentina’s government hasn’t been to the international debt markets since its default in 2001 and its provincial governments and corporations have largely been shut out of foreign capital markets. Investors are generally nervous about economic policies pursued by Argentine president Cristina Kirchner, which include currency controls, high tax revenues, the nationalisation of the pension fund industry in 2008, and a growing reliance on the central bank as a lender of last resort.

Argentina’s inflation rate began 2013 at over 11% according to official government data, but analysts claim that the actual rate has now moved over 25%.

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