Tuesday, June 24, 2014

Argentina's holdout debt dilemma

We've received a number of questions regarding the implications of the recent US court ruling on Argentina. In spite of the complexities involved, the situation is quite clear. The country just doesn't have the dollars to pay the 2001 restructuring holdouts (the bond holders that did not accept the restructuring terms). Decades of socialist-style mismanagement, populist policies, cronyism, and incompetent leadership resulted in the nation squandering a great deal of its national wealth. As China-driven natural resource supercycle came to an end, Argentina found itself on the edge of collapse. With inflation running at 35% and foreign reserves near multi-year lows, the country's options are limited.

As usual, the government will try more legal maneuvers in the US (see story) and will continue blaming the bond holdouts for trying to claim what's legally theirs. The creditors however are not a charity that is willing to dump their dollars into the pockets of Argentina's corrupt politicians. In the end, Argentina can either negotiate for a settlement with the holdouts or default. Sovereign bond default could however prove to be devastating.
JPMorgan: - Despite the political rhetoric, the Argentine government finds itself in a position of political and financial weakness; defaulting to avoid payment to holdouts is not easy to embrace. Suffering a credit event would have significant implications for the economy, and Argentina’s ongoing efforts to normalize its relationship with private creditors (settlements with ICSID claims, Repsol, and the Paris Club, and revamping statistics under IMF supervision) would be cut short. Opposition political leaders have generally publicly advocated a negotiation, which reduces the political cost for the president to engage creditors.
But even if negotiations do take place, the risk of default remains substantial.
Natixis: - The Argentinean government will continue to sell its good intentions and play the victim locally. Nevertheless, there is a serious risk of default and the clock is ticking. S&P downgraded this week Argentina to CCC-with a negative outlook since the court decision meant that the country will either default on the payment or face a distressed debt exchange. The execution risk is high as the needs to achieve an 85% participation rate in order to avoid a default.

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