It’s going right down to the wire — Argentina has just hours to avoid a second debt default in 13 years that could plunge the country into turmoil.
The crisis stems from a legal battle with a small group of “holdout” creditors that have demanded payment of about $1.5 billion on bonds they bought after the $144 billion default in 2001.
That standoff has blocked payments to other creditors. Unless they resume by midnight Wednesday, Argentina will have broken its promise to investors again.
If that happens, the country may have to devalue its currency to preserve foreign currency reserves, and that could trigger a dangerous rise in inflation that is already projected to hit 40%.
The peso has fallen by about 25% against the dollar this year.
“It’s the worst moment for Argentina to go into default … because they need fresh sources of funding, and that is only possible if they sort out in a positive way their dispute with the holdout creditors,” said Carlos Caicedo, senior analyst for Latin America at IHS.
“Social unrest is a possibility,” he told CNN.
Signs of progress?
The chances of a deal at the eleventh hour appear to have improved, however.
Economy minister Axel Kicillof met the “holdouts” for the first time in New York on Tuesday for several hours of talks. Daniel Pollack, the court-appointed mediator, said there was a “frank exchange of views and concerns,” but that the dispute remained unresolved.
Argentina’s banks may also be ready to throw the government a lifeline. The Wall Street Journal reported that they could agree to pay off the “holdout” creditors — NML Capital and Aurelius Management — and wait until next year to be repaid with government bonds.
“There is an indication … that something substantial is being discussed,” said IHS’ Caicedo. “There is still a possibility of the default being avoided today.”
Talks are due to resume Wednesday.
How did it come to this?
The crisis has its roots in Argentina’s last default. It reached agreement with 93% of creditors to restructure its debt, but 7% refused to accept.
The countdown to a new default started in earnest last month when a U.S. judge ruled that if Argentina doesn’t pay the holdouts, it can’t make any more payments to restructured bondholders.
Argentina is worried that a deal with the holdouts could trigger billions of dollars in additional claims — money it doesn’t have. The country’s government also insists it doesn’t have enough time to reach a fair resolution.
Serial offender?
Another default would be Argentina’s third in 25 years, according to ratings agency Moody’s. Still, it no longer holds the record for the biggest — that now belongs to Greece after its distressed debt exchange worth $273 billion at the height of the eurozone crisis in 2012. Russia’s $39 billion default in 1998 is the third largest in history.
