Update on Argentina Debt Situation

Earlier we ran an article on the US Supreme Court decision that allowed some hedge fund bond holders to be paid in full on some bonds they bought from Argentina years ago at a steep discount. Argentina had settled with 90% of the rest of the bondholders who took losses on the bonds. Argentina has not yet agreed pay these bondholders with a July 30 deadline looming. If they don't pay and the deadline is not extended, Argentina will be in default. Here is the latest on that situation and also a couple of related articles of interest.

So with about 11 days to go Argentina has not settled yet and according to the Reuters article above has not even scheduled talks. Here is a quote from one of the investors holding the bonds:

"The Argentine government appears determined to default. We hope it chooses to avoid this dead-end path," NML said.

The article also says:

"NML Capital Ltd, a unit of Elliott Management Corp suing for full repayment on its bondholdings, said Argentine officials refused to meet or negotiate ahead of a July 30 deadline."

It looks like Argentina is playing hard ball in this situation and has asked for a stay of the July 30th deadline. It is hard to tell if this will get resolved or if Argentina will actually default on these bonds. We will follow it to see what happens.

This story allows us to mention a couple of other semi-related articles of interest. First we have this news of China giving Argentina a $7.5 billion loan. A reasonable question to ask is why would you loan $7.5 billion to a country which may default on its old bonds in a few days? A guess might be to allow China (and BRICS) to gain influence with Argentina and elsewhere in South America. Putin went to Argentina just before the BRICS summit and talked about improving trade and relations etc. The BRICS were said to be courting Argentina to join with them "after they clean up their bond situation". So this could be a strategic move by China-BRICS to gain influence seeing that Argentina is upset with the US court ruling right now.

Here is the really interesting article all readers here need to read. It is an article in the Economist  titled "Busted Flush" about sovereign debt restructuring. The article uses the current Argentina situation to bring up the general topic of how the IMF wants to deal with sovereign debt problems in general. This where the article gets our attention.

Below we will paste a few quotes and then add some comments in bold type just below.

"Meanwhile the IMF’s new plans could make the modification of debt contracts more frequent. Because the fund is often a troubled debtor’s only source of cash, the terms on which it lends can dictate whether or not other creditors get paid. It is seared by the experience of Greece, where (along with the European Union) it provided a giant bail-out in 2010 to avoid a restructuring that nonetheless took place in 2012. In response, it is proposing two changes to its rules. First, it wants greater leeway to support the “reprofiling” of sovereign debt. Reprofiling is a relatively gentle form of restructuring, in which the maturity of bonds is extended but the amount owed and interest rate stay the same.

The fund also wants to limit the risk of being dragooned into lending huge amounts to stave off default in a country whose debts are unlikely to be sustainable by getting rid of a “systemic exemption” to its lending rules. Introduced during the euro crisis, this exemption condones large loans to countries that are poor credit risks if they are important enough to pose a threat to the global financial system.

It's important to know what the IMF is thinking about how to resolve sovereign debt problems because there are still plenty of places around the world where a sovereign crisis could happen. Right now things seem calm, but we all know that there is unsustainable debt out there. Obviously the IMF is concerned because they want to get rid of a rule that might make them issue loans to "a country whose debts are unlikely to be sustainable" as noted in the article. 

The article also points out this rule was put in place because of countries that are "poor credit risks" and also "important enough to pose a threat to the global financial system". Using some common sense, this tells us that there are still countries out there with possible unsustainable sovereign debt that could pose a threat to the global financial system. Today things may be calm, but the IMF wants off the hook if things change tomorrow. Just something to note because an event like that would clearly impact the global monetary system and certainly cause major change.

"The two proposals—which have yet to be approved by the IMF’s board—are much less ambitious than earlier ones. In 2002 the fund pushed for, but failed to get agreement on, a “sovereign-debt restructuring mechanism”(SDRM), akin to an international bankruptcy court. The new plan would simply lead to more equal treatment for would-be borrowers and, at the margin, might encourage more countries to reprofile their debts earlier."

A couple of things to note here. First, once again, these reform proposals are not yet approved at the IMF (like the 2010 quota reforms). Second, this article mentions the earlier attempt in 2002  to set up a "sovereign-debt restructuring mechanism (SDRM), akin to an international bankruptcy court". 

All of this tells us these sovereign debt issues are an ongoing problem and there still is not a general agreement on how to resovle them when they happen. As we see in Argentina, there is the potential for a mess. If a country that could be "a threat to the global financial system" were to default, we could have a really big mess.

This is why the Argentina case is so important to the IMF, the UN, and others who issued public statements of concern about the US Supreme Court decision. The whole issue of how to deal with sovereign debt default is up in the air now.

We noted in our earlier article "Where is all this Leading? When will it happen" that we believe the resolution of unsustainable sovereign debt will be part of the process of a transition to a new system. The question is whether this will get taken care of in controlled way over time using a master plan or whether a crisis will erupt suddenly that spins out of control with no approved plan in place to deal with it. 

And always keep in mind that around the world there are huge interest rate related derivative products out there. It is literally impossible to know what might happen with those if a default happened in a major country. It can quickly set off a chain reaction because of the interconnected nature of all this.

It is just another area we need to be informed about and watch. At times it seems like the problems are endless, but we do know that efforts are being made inside the system to address the problems. We believe there is awareness of the problems as well. So, all we can do here is just watch and see what happens and hope the right plans are put in place to deal with the debt problems as they arise.