Deadline passes to repay hedge funds, Argentina defaults

With Standard & Poor’s saying Argentina is in default and last-minute plans to remedy the situation falling through, investor focus is turning to whether holders of $29 billion of bonds will demand immediate repayment.

The nation missed a deadline yesterday to pay $539 million in interest after two full days of negotiations in New York failed to produce an accord with creditors from its last default in 2001. A U.S. judge ruled that the payment couldn’t be made unless those investors, a group of hedge funds led by Elliott Management Corp., got the $1.5 billion they claimed.

As Economy Minister Axel Kicillof returns to Buenos Aires with no set plans for further discussions with the hedge funds he described as “vultures,” other creditors must decide whether to invoke a clause that entitles them to demand their money back. While an 11th-hour attempt last night by a group of Argentine banks to avert a crisis by purchasing the securities from Elliott fell through, bondholders probably will give the parties more time to reach a settlement, according to Bank of America Corp.

“It’s in their best interest to delay acceleration and not introduce more difficulties,” Jane Brauer, a strategist at Bank of America, said by phone from New York. “The best thing for Argentina to do is to continue seeking a solution.”

Argentina has about $29 billion of bonds sold in international markets and denominated in foreign currencies with so-called cross-default provisions. Under their terms, Argentina would have to pay back the entire balance -- plus unpaid interest -- if at least 25 percent of holders demand that their money be returned. The potential liabilities are equal to the country’s foreign reserves, which are already hovering close to an eight-year low.


Previous Swaps

S&P’s declaration came after the expiration yesterday of a 30-day grace period on the original June 30 payment deadline. If Argentina is able to figure out a way to make its debt payments, the ratings could be revised “depending on our assessment at that time of Argentina’s residual litigation risk, its access to international debt markets and its overall credit profile,” S&P said.

“If there is a hint of a potential deal, bondholders will not be incentivized to accelerate,” Patrick Esteruelas, senior analyst at Emso Partners Ltd., a money-management firm specializing in emerging markets, said in an e-mail.

Kicillof, speaking late yesterday at the Argentine consulate in New York, told reporters that the holdouts rebuffed all offers and wouldn’t endorse a stay of the court ruling that would have allowed more time for talks.


Real Suffering

Elliott’s NML unit said in an e-mailed statement that Argentina refused to seriously consider a court-appointed mediator’s “numerous creative solutions” for resolving the dispute. NML said it found many of those options acceptable.

Daniel Pollack, the mediator, wrote in his own e-mailed statement that “real people” are likely to suffer because of Argentina’s default.

“The full consequences of default are not predictable, but they certainly are not positive,” Pollack wrote.

The economy, already headed for its first annual contraction since 2002 amid 40 percent inflation, will suffer in a default scenario as Argentines scrambling for dollars cause the peso to weaken and activity to slump, according to Hernan Yellati, the head of research at Banctrust & Co.

The country hasn’t been able to access international credit markets since its $95 billion default 13 years ago. Credit- default swaps to protect against losses from an Argentine default over the next three months had become the most expensive in the world, according to data compiled by CMA.

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