Argentina is on the brink of its second debt default since the turn of the century, as hopes fade that last-minute talks will hammer out a deal with "vulture fund" bondholders. Argentinian officials met a US mediator in New York in the latest chapter of a decade-long debt battle with hedge funds that bought up the country's bonds at rock-bottom prices in the wake of its financial crisis in 2001 and 2002.
The creditors are demanding full repayment on their investments, having refused to join the vast majority of Argentina's bondholders in accepting debt restructuring deals in 2005 and 2010 that would have seen their value slashed.
The value of the bonds, plus interest accrued, is more than $1.5bn (£885m), which a US judge says is due to the so-called holdout bondholders.
If Argentina fails to or refuses to pay that amount by Wednesday, it will technically be defaulting on its debt obligations. It would be the second time in only 12 years, after the country defaulted on around $100bn of debt during its previous crisis.
Analysts said a technical default looked likely given the scant progress on any kind of agreement in recent weeks, but there were reassurances that it would have few repercussions for global markets.
There were pleas from some of the exchange bondholders hoping to avert a default and years more of legal wrangling. "A default would undo much of the work this court has accomplished over the last 10 years and extend litigation here and around the world for years on end," Reuters reported them as saying.
Christine Lagarde, managing director of the International Monetary Fund, said the impact on other countries would be limited because of Argentina's effective isolation from international markets for over a decade. "While default is always regrettable, we do not believe that it would have major substantive consequences outside, on a much broader basis," she said on Tuesday night.
"The outcome of the legal decisions that are being made in New York at the moment … have much broader significance," Reuters quoted her as saying. "The debt restructuring principles and the efficiency of collective action clauses will have to be reviewed," she said, alluding to work the IMF has done on sovereign debt contracts and how to deal with post-default issues.
Unlike the last default when Argentina was unable to pay, this time it would be more on a point of principle rather than out of necessity. The government has said, however, that it cannot afford to pay the holdouts in full and meet its other interest payments. The US hedge funds contest this and have accused Argentina's government of refusing to begin talks.
Branded vulture funds by Argentina and debt campaigners, the creditors holding out for full repayment are New York hedge funds spearheaded by the billionaire Paul Singer's NML Capital, an affiliate of Elliott Management, and Aurelius Capital Management. They make up a small proportion of the country's creditors.
More than 92% of Argentina's bondholders agreed to deals in 2005 and 2010, under which they would get regular interest payments provided they accepted a reduction of more than 70% in the value of their investment, known as a haircut.
The government attempted to pay the holders of restructured debt their latest interest payment at the end of June, but were barred from doing so by a judge in the US, where the legal battle with the holdouts has taken place. The US district judge Thomas Griesa has said it would be illegal for Argentina to make a payment to the bondholders without also paying more than $1.5bn to the holdouts.
Argentina now appears to have reached the end of the road on averting a fresh default. The latest deadline marks the end of a 30-day grace period beyond which the latest instalment was due to the creditors who restructured in 2005 and 2010, also known as exchange bondholders.
Argentina has suffered a number of setbacks in US courts, the latest being last month when the US supreme court refused to hear an appeal against a lower court's rulingthat came down in favour of the holdout creditors.
The country's president, Cristina Fernández de Kirchner, fears that any deal to pay more to the hedge funds could trigger lawsuits from other bondholders demanding to be paid on similar terms. Her government estimates that the liability could run as high as $15bn.
Debt campaigners have said that the rulings in the US have implications well beyond Argentina by undoing years of progress in reducing debt burdens on poor countries. They say a victory for the holdouts would set a precedent for other investors to wreck long-standing debt forgiveness deals with developing countries.
Ministers relaxed about prospect of default
As Argentina stares down the barrel of a default, the government of President Cristina Fernández seems unperturbed by its likely economic consequences. It is almost relishing what it sees as a valiant stand against capitalist imperialism by refusing to pay the holdouts.
"Cristina has grown with this as [General] Galtieri did during the Falkands War," said opposition leader Elisa Carrió. "We Argentines love to applaud this kind of behaviour, but afterwards we end up crying."
Buenos Aires awoke on Tuesday to billboards reading "Griesa or Cristina", in reference to New York Judge Thomas Griesa, who has ordered Argentina to pay the holdouts. Meanwhile, the government maintains that the likely default will have no negative consequences.
"We are not going to have any problem on the 30th," said Axel Kiciloff, Argentina's economy minister. Speaking at a meeting of South American economy ministers in Buenos Aires, he blamed Argentina's current crisis on "attacks by speculators supported by central nations. We will not give in to blackmail." He described Griesa's ruling as "unprecedented, unheard of, incomprehensible and uncompliable". The court-sponsored mediation talks with the holdouts that he attended in New York he described as "a jigsaw puzzle, a tongue twister".
Business leaders disagree. "We have a minister who says it's the same whether we go into default or not," said Héctor Méndez, head of the UIA industrial union. "The economy is in bad shape. All sectors of industry are showing important slowdowns, with an average of 25%."
A survey of Argentine business leaders found that the outlook of 51% of respondents was negative. Carrió, a legislator of the middle-of-the-road UNEN political party, last night laughed off the government's claim that there can be no real default because it has paid restructured bond holders.
"We owe the grocer, but we also owe the butcher," said Carrió. "The butcher is very mean, but we owe him. Cristina [Fernández] say she already paid, but who did you pay? You paid the grocer, but if you don't pay the butcher as well they won't unblock your funds. What Cristina doesn't take into account is the amount of poverty she will be creating with her whimsical behaviour."
Uki Goni
