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Argentina is down to the wire — the likelihood it will default tomorrow is extremely high. After missing a $539 million interest payment on its bonds on June 30 (previous coverage in the saga here and here), the country had a 30-day grace period to reach a settlement with its holdout creditors — mostly the hedge fund Elliott Management — in order to avoid default. The clock runs out on Wednesday.
While the federal judge presiding over the case between the sovereign nation and the fund has ordered the country’s representatives to sit down with Elliott continuously to try to hammer out a settlement agreement, they have so far not spent more than a few hours in negotiations. So what happens if the country defaults? The question is complicated, and there won’t be clear cut answers until a default actually happens (and, probably, lawsuits ensue). Here are some thoughts:
Felix Salmon says there could be a benefit to defaulting, since everyone knows that Argentina has the money to pay its exchange bondholders (those that did restructure debt from the 2001 default), it is just being help up on a legal technicality. By defaulting, “Argentina could stop making its coupon payments for a while, and use the money instead on desperately-needed projects back home.” And while default is generally a bad political move, all Argentine president Cristina Fernández de Kirchner has to do is point her finger at the U.S. judge who forced her hand.
The Financial Times reports that “economists broadly expect a recession in the country would deepen, inflation to rise and capital flight – possibly triggering a second devaluation of the peso this year.” Indeed, while default may not have as big of an effect on the country in international capital markets (which it has been locked out of for ages anyway), it almost certainly will be an issue for the domestic economy. In the event of a default, writes David Gaffen, “Argentines would likely increase their dollar holdings, and would put severe pressure on foreign reserves, which aren’t all that great to begin with. With inflation at about 30 percent, this isn’t a fun option.”
Then, there’s RUFO. One of the big reasons that Argentina has so far refused to negotiate is because of the Rights Upon Future Offers clause on the bonds that were exchanged during the restructuring. “The clause entitles them to the upside if Argentina ‘voluntarily’ makes a better offer to the creditors who stayed out (that’s NML [Capital] and co) before 31 December 2014,” writes Joseph Cotterill. This likely means that if Argentina settles with the holdouts before the end of the year, the exchange bondholders will also be entitled to more money, which Argentina simply cannot afford. Emerging market strategist Michael Roche told Bloomberg that investors think “the default will be cured after the RUFO clause expires, so the degree of panic isn’t great.”
The question is, what happens between tomorrow and December 31? Some exchange bondholders have submitted they are willing to waive RUFO clause rights. But whether that’s enough to get Argentina to settle is another question entirely. We’ll know soon enough. — Shane Ferro
On to today’s links: