Second Default for Argentina as Deadline Runs out

Following a breakdown in talks with its US creditors, Argentina has failed to make scheduled payments on its government bonds and sent the country into its second default in 13 years.

More than five hours of meetings on 30 July failed to resolve a deadlock between the two sides. The court-appointed mediator said that Argentina would “imminently be in default,” a verdict that was supported by the credit ratings agency (CRA) Standard & Poor’s (S&P).

Argentina
had been given until that date
to make a US$539m interest payment on US$13bn in restructured bonds. However, it failed to meet the deadline as the country continues its long-running dispute with the hedge funds holding its debt, including billionaire Paul Singer’s firm Elliott Management.

A federal court in Manhattan has ruled that until the dispute is settled, Argentina is barred from paying its main bondholders. A court-appointed mediator presiding over talks in New York failed to achieve any resolution.

However, investors had been braced for bad news and the absence of any last-minute deal appears to have had little effect on global financial markets.

Argentina has resisted the demands of what it dubs the ‘vulture funds’ and after the talks collapsed, the country’s economy minister, Axel Kicillof, described the negotiations as extortion.

“We’re not going to sign any deal which compromises the future of Argentines,” he said at a Manhattan news conference. He added that paying the US$1.5bn owed to US hedge funds would force Argentina to make similar payments to other bondholders.

Legal filings indicate the face value of Elliott’s Argentine government bonds to be no more than US$170m; although reports suggest that the firm most likely acquired many of them for much less than that. Elliott and other investors are now seeking more than US$1.5bn, which includes years of unpaid interest.

The origins of the dispute date back to 2001, when Argentina, overwhelmed by its sovereign debt load, decided to default on its obligations. The country later offered to exchange their defaulted securities for new ‘exchange bonds’ that were worth much less the original bonds.

Most investors participated in these swaps, but some decided instead to fight the government for full repayment. The so-called ‘holdouts’ included many individual investors as well as a unit of Elliott called NML Capital and other hedge funds including Aurelius Capital Management.

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