Crying for Argentina: It has defaulted on its debts again and bondholders could take it to the brink...

But investors are betting that a deal with the vultures will come. Ben Chu looks at the domestic and global implications

economics editor

In the end, Argentina did not swerve in its game of chicken with the vultures. On Wednesday night it failed to make a scheduled payment on its sovereign debts, despite the inordinate legal pressure brought to bear by a group of “vulture” American hedge funds that have snapped up a $1.5bn slice of the nation’s sovereign bonds.

Standard & Poor’s duly downgraded Argentina’s credit rating from triple C minus to “selective default”. The country has now failed to meet its sovereign liabilities for the second time in 13 years.

But what are the implications? The market price of long-term Argentinian bonds was not significantly moved by the default announcement. The yield, or effective interest rate, on a tranche that matures in 2033 steadied at around  9.6 per cent yesterday, suggesting that the impact of the default was priced in by the market.

However, yields could rise rapidly if Argentina’s bondholders lose their patience and demand full and immediate payment of the $29bn (£17bn) or so that they are owed, as is their right. That sum is roughly equal to Argentina’s foreign exchange reserves, which could mean an intense squeeze on the domestic economy.

In any case, the borrowing costs of Argentinian households and major companies are likely to rise as a result of the default. That will not help Argentina’s economy, which was already contracting before this week’s default.

Annualised real GDP growth turned negative in the first quarter of the year, according to the country’s official statistics agency. In its most recent forecast, the International Monetary Fund expected growth of just 0.5 per cent in 2014 for South America’s second-largest economy after Brazil. That is now very likely to be downgraded.

Inflation is also already relatively high at 12 per cent (40 per cent according to some unofficial measures), and the cost of living is likely to rise still higher. The Argentinian peso instantly fell 4.4 per cent against the US dollar on the unofficial “blue” market yesterday, and a second full-scale devaluation in a year could be on the cards. Unemployment, currently 7.1 per cent, could easily jump.

Yet analysts are not expecting a repeat of the chaos in 2001-02 when the country defaulted on $95bn of debts. At that time, domestic savers’ accounts were frozen to stop bank runs. Inflation went through the roof as the peg with the dollar was broken. Street protests saw scores of deaths. GDP contracted by 10 per cent.


Another fear before the latest default was the possibility of contagion in other emerging market countries. But though global equity markets were down yesterday, there was no panic. There was no repeat of last year’s sudden outflows of hot capital from emerging markets when traders and investors believed that the US Federal Reserve was on the verge of ending its monetary stimulus.

One possible reason for this is a belief among investors  that, despite Argentina’s default, a deal with the vultures will still come. The country, after all, is not insolvent this time. The government of President Cristina Fernandez de Kirchner is willing and able to pay those creditors who have agreed to a restructuring.

It was blocked from doing so by an American court when Thomas Griesa, in a momentous judgment, ruled that Argentina cannot make interest payments to the majority of bondholders who have accepted a restructuring in the wake of the last default, unless it first pays out in full to the hedge funds – including Paul Singer’s Elliott Management and Mark Brodsky’s Aurelius Capital Management  – that refused to participate in the swap.

There have been suggestions that US investment banks or Argentinian local banks might offer to buy the bonds from the hedge funds. Standard & Poor’s has said it will revise the “default” rating if an agreement can be reached.

However, the basic impasse remains, despite this week’s drama. Argentina claims that if it gives the vultures what they are demanding, it will need to pay all bondholders the original amount, so unravelling the restructuring deal and sending the country’s total bill up to $200bn – a sum equal to  40 per cent of Argentina’s annual GDP. The hedge funds dispute that the law requires this. Yet that Buenos Aires was willing to accept the risk of default – after taking significant steps over the past year to restore its standing with the world capital markets   – implies this concern is more than just a negotiating tactic.

The simple passage of time may help in producing a resolution. A key clause in the bonds expires at the end of the year, which may be when a deal is done, according to some analysts. “This probably will be fixed in the next six months,” said Alberto Bernal of Bulltick Capital Markets. “Argentinians need the money, they need to come back to the market, and the holdouts want to get paid.”

The wider legal implications of this high-stakes stand-off are also unclear. Some argue that Judge Griesa’s ruling sets a dangerous precedent, making it impossible for sovereign nations to negotiate necessary restructuring deals with bondholders. The IMF itself has raised this concern.

Others counter that, on the contrary, this legal battle will accelerate reforms of the sovereign debt markets, ultimately making it impossible for bondholders, like the vulture funds, to hold out on these kind of swap deals in future.

So will the case of Argentina and the vultures make global financial markets more, or less, stable? It is difficult at this early stage to say. But the dice has now been rolled.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Joe Cocker performing on the Stravinski hall stage during the Montreux Jazz Festival, in Montreux, Switzerland in 2002
musicHe 'turned my song into an anthem', says former Beatle
Clarke Carlisle
footballStoke City vs Chelsea match report
Arts and Entertainment
theatreThe US stars who've taken to UK panto, from Hasselhoff to Hall
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Life and Style
Approaching sale shopping in a smart way means that you’ll get the most out of your money
life + styleSales shopping tips and tricks from the experts
newsIt was due to be auctioned off for charity
Coca-Cola has become one of the largest companies in the world to push staff towards switching off their voicemails, in a move intended to streamline operations and boost productivity
peopleCoca-Cola staff urged to switch it off to boost productivity
Sir David Attenborough
environment... as well as a plant and a spider
'That's the legal bit done. Now on to the ceremony!'
voicesThe fight for marriage equality isn't over yet, says Siobhan Fenton
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

SThree: Graduate Recruitment Consultant

£20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...

Day In a Page

Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'