Thursday, July 31, 2014

Argentina Defaults on Debt

Argentina was declared in default on bonds after it was unable to reach a deal with the bondholders. Most articles on the default suggest that any problems with this situation will remain contained with Argentina and there not should not be any "contagion" that would impact the global financial system. But Jim Rickards says its too early to know that in an interview with CNBC. Below are links to his interview and a few other articles about the default.

When a nation defaults on its sovereign debt, that is something we will cover here because it can potentially impact the global financial system. In the case of Argentina, most analysts are saying they don't expect that to happen here as you can see in the linked articles below.

That doesn't mean there is not concern about global impact though. Both the IMF and the World Bank issued statements of concern in this case about the US courts siding with the bondholders. Their concern is that this will make it harder in the future to resolve other cases where a nation defaults on its debt. 

Back to this case. Jim Rickards points out in this CNBC interview  that it is too early for analysts to say with certainty there will be no contagion because of hidden derivative products that could be out there tied to this debt (something we have noted here as well). In other words, a problem anywhere can lead to a problem everywhere. 

Here are a few articles that will provide you broad coverage on the event. If anything does develope suggesting contagion in the next few days, we will certainly cover that here.

The Guardian (this article references the IMF unsuccessful effort to set up a Sovereign Debt Mechanism or SDRM)

We have also seen some articles suggesting that this may open the door for Argentina to join the BRICS once this debt is resolved. They are very unhappy with how the US courts handled this case. China in particular is interested in closer ties with Argentina. Some are saying that China might help restore Argentina's credit standing in exchange for access to natural resources and to gain a stronger foothold in South America

Everything that happens these days seems to have geopolitical ramifications on the giant world chess board. And those ramifications could include impact on the monetary system at some point in the future.

For us here, we have to keep watch because some day one of these sovereign debt situations may become a trigger event that does cause global contagion. That could lead to rapid monetary system changes. Sometimes it is not the debt itself that is the problem, but the unknown derivative products out there that may be tied to the debt or interest rates. 

Related to that, here is a tweet out from Jim Rickards this morning:

"The problem in 2007 wasn't $1 Trillion in subprime, it was $6 Trillion in subprime linked swaps. Watch swaps for the real action"

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