Sunday, January 11, 2015

Update on Argentina Debt Default Situation

Earlier this year Argentina went into default on some of its bonds despite a court order from a US judge to pay off the debt. It was assumed that after the end of this year, a new round of settlement talks would begin between Argentina and those holding the defaulted bonds. This update from Reuters indicates that is apparently not the case. Now it looks like the issue will hang on until the next election in Argentina which is in October 2015. Some quotes from the article below.


"Crunch time for Argentina fixing its debt default will almost certainly not be January, as many investors had hoped, but a year later once the country's next president takes office and tries to get the ailing economy moving again.

The South American country is locked in a battle with a group of U.S. hedge funds over unpaid debt. Despite a U.S. court order to fully repay the $1.3 billion debt plus interest, Argentina insists the hedge funds accept reduced payment.

The standoff has put a chokehold on investment in Argentina as the economy stagnates under the weight of tough trade and currency controls.

In July, Argentina tipped back into default, as President Cristina Fernandez vowed never to pay the face value of the bonds to the funds she derides as "vultures". The funds, in turn, have declined her offer of payment under terms of the bond swaps that followed Argentina's record default in 2002.
The debt restructuring contract contains a clause that Fernandez has invoked to refrain from hiking the payment offer. Expiration of the RUFO clause on Dec. 31 would allow her to boost the offer in 2015, but she remains opposed to the idea.
That leaves Argentina's presidential election in October as the next likely turning point in the decade-long dispute, as the constitution prohibits Fernandez from running for another term."
My added comments: This whole situation has the IMF and the World Bank concerned because it is establishing a legal precedent in cases where a government wants to settle unpayable debt by forcing debt holders to accept a "haircut" on the debt. If some debt holders can refuse the settlement offer, this can cause the whole process to drag on for years. 
The IMF has issued a number of work papers on this topic and there is a strong move in progress to encourage governments to include legal clauses in their debt obligations that force all debt holders to accept any deal made with a majority of the bond holders in these situations. None of this is likely to instill more confidence in investors to hold government bonds in any country where the debt is in question (which is a lot of countries these days).

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