Default Redux: Argentina Fails to Reach Agreement with Holdout Creditors

Argentina’s thirty day grace period to pay holdout creditors in full and make a scheduled interest payment to restructured bondholders expired on Wednesday (July 30). Argentina was negotiating with holdout creditors through a court-appointed mediator, but ultimately no agreement was reached, and Judge Griesa denied Argentina’s request for a stay, which would have allowed negotiations to continue without triggering default. As a result, Standard & Poor’s downgraded Argentina’s foreign-currency credit rating to technical default at the close of the business day on Wednesday.

S&P has indicated that this rating downgrade may be reversed if and when Argentina makes its missed coupon payment—which, in accordance with the US Supreme Court’s ruling on the matter, can only happen when Argentina either pays or reaches a deal with holdout creditors.

What does this mean for Argentina and the business environment?

As we noted in our previous post on this subject, there is little risk of regional contagion, as Argentina has been locked out of international capital markets since its earlier default in 2001-2002. The most significant consequence of this default is that Argentina will remain locked out of capital markets unless and until a deal with holdout creditors is reached and they are able to resume coupon payments to restructured bond holders.

This means that domestic companies, government agencies, municipalities, and consumers will face more restrictive credit conditions and may in fact see their access to credit dry up. The default will also prevent the Argentine government from returning to capital markets to borrow abroad to bolster reserves and fund deficit spending, increasing the likelihood of either a forced shift to austerity or a reversion to expansionary monetary policy which will stoke already-high inflation. There are also negative implications for the exchange rate and increased likelihood of additional one-off devaluation(s), as Argentine reserves remain precipitously low, capital flight is likely, and the likelihood of kick-starting FDI is much lower in the wake of default.

Argentina Default Chart

Default also has financial implications for Argentina, in that cross-default clauses give other bondholders the right to demand immediate payment of the principal and all interest due. There are also cross-default provisions which would allow investors owning other series of bonds worth an estimated US$ 29 billion (roughly equal to Argentina’s total foreign exchange reserves) to make acceleration demands as well, even if they themselves were not owed a coupon payment on June 30. Most observers feel that it is unlikely this would happen over the near term, but in absence of a deal, the risk of such troubles would increase.

Key signposts to monitor include:

  • Possibility of a deal: Argentina can still emerge from default if a settlement is reached in the next few days and the missed coupon payment is issued. Given the financial liabilities entailed by the threat of acceleration, it is certainly in Argentina’s interest to reach a deal, either bilaterally or, perhaps, as yesterday’s events suggest, through a third party such as the banking association.
  • Bond prices: Much will depend on government actions; at present, prices have fallen but remain above levels seen in Argentina’s previous default; future movements will depend on likelihood of a deal being reached
  • International Swaps and Derivatives Association’s ruling: The ISDA’s ruling is expected later this week/early next week, and will formally trigger CDS payments

What can you do to help protect your business?

  • FSG has a host of resources on contingency planning and management challenges in risky markets, including Argentina and Venezuela. We encourage FSG clients to take a look at these resources on our portal, and reach out to your account manager to set up an analyst conversation for an in-depth walk through.
  • We recently released a piece on scenario planning for Argentina, which will help you set expectations regarding the implications of Argentina’s near- to medium-term outlook for your business.

Leave a Reply

Your email address will not be published. Required fields are marked *