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Overview: The situation in Argentina

Surbhi Jain

Must-know: Argentina defaults for the second time in 13 years (Part 3 of 5)

(Continued from Part 2)

The situation in Argentina

Argentina is the third-largest economy in Latin America. The country which is home to the tango dance, is currently in a difficult situation. A ruling by U.S. District Judge Thomas Griesa, in favor of hedge funds NML Capital and Aurelius Capital Management, led the country in a situation where a sovereign default became inevitable.

Argentina has defaulted for the second time in 13 years. It wasn’t able to reach a deal with the U.S. hedge funds before July 30. The country had defaulted earlier in 2001 when it had ~$100 billion in debt obligations restructured.

The 2001 debt restructuring

In the wake of a financial crisis in 2001, Argentina’s government had offered bondholders a deal in which they would get regular payments of interest provided that they accepted a more than 70% reduction in the value of their investment, also known as a haircut. Accordingly, more than 92% of bondholders had agreed to the offer. The “hold-outs” were among the 7% who had rejected the terms and sued to reclaim all principal and unpaid interest.

Also known as “vulture funds,” the holdout creditors are New York hedge funds, NML Capital, and Aurelius Capital Management. They hold debt worth $1.3 billion, which has hit rock-bottom prices following Argentina’s financial crisis of 2001–2002.

Judge Thomas Griesa’s ruling

Under the latest ruling issued by U.S. District Judge Thomas Griesa, Argentina couldn’t pay the 92% of its creditors who had agreed to the restructuring of its debt in the 2001 default, without also paying the entire $1.3 billion claimed by hedge funds NML Capital and Aurelius Capital Management. Judge Griesa had blocked payments on the restructured debt as long as Argentina refused to pay the hedge funds, although Argentina had deposited the interest due on the 2033 bonds last month.

July 30 marked the end of a 30-day grace period beyond June 30 when the latest installment of money was due to the holders of the restructured debt. Also, non-payment of the overdue interest on the bonds due 2033 by July 30, will trigger provisions in the bond indentures known as cross-default clauses which would allow the country’s other debt holders to also demand their money back immediately.

The hard situation

The situation was difficult for Argentina because if it paid the hedge funds in full, it would have been inviting an outbreak of claims for equal treatment by the other 92% creditors who had agreed to take a 70% haircut on their bonds.

As a result, Argentina had until July 30 to either negotiate a settlement, or repay the so-called “holdout” investors or vulture funds, who had sued the country for full repayment on their bonds. Since it failed to pay by that deadline, Argentina has officially default for the second time in 13 years.

Argentina, a country that has attracted international brand companies in the past like Coca-Cola’s (KO) bottler Embotelladora Andina (AKO.A), Ralph Lauren (RL), and Louis Vuitton SA (LVMUY) as private consumption accounted for about two-thirds of the economy, has defaulted on its international debt obligations. U.S. investors with exchange-traded funds (or ETFs) like the Global X FTSE Argentina 20 ETF (ARGT) in their portfolio may want to reassess their holdings. So, what led Argentina to default? The next part of this series will explain why Argentina defaulted.

Continue to Part 4

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