Argentine default: Billions on the line


Argentina and a group of American hedge funds that own Argentine bonds were negotiating Tuesday seeking an agreement on repayment of Argentina’s debt. If no agreement is reached and Argentina doesn’t repay the bondholders by Wednesday, it will default on its debt for the second time in 13 years.

Q. What’s the dispute about?

A. In 2001, Argentina defaulted on $95 billion of debt, one of the biggest defaults in history. That sent the price of Argentine debt plunging. Hedge funds stepped in to buy the now-discounted debt in hopes Argentina eventually would be required to repay the face value of the bond. Argentina offered to pay the bondholders lower amounts and by 2010, 92 percent had agreed to accept payments 70 percent lower than the face value of the debt. A small group of bondholders, led by billionaire Paul Singer and his hedge fund, NML Capital, refused to accept the lower payments and sued Argentina in U.S. court because the bonds were issued under U.S. law.

Q. Why could Argentina default on its debt Wednesday?

U.S. District Judge Thomas Griesa of the Southern District of New York ruled that Argentina must pay the holdout creditors in full at the same time it pays the bondholders who agreed to accept lower payments. His ruling was upheld by the U.S. Supreme Court in June. Argentina attempted to make the lower payments to bondholders who’d accepted the restructuring as scheduled on June 30, but Griesa ruled such a payment was illegal unless the holdout bondholders also were paid. When the scheduled payment wasn’t made, that started a 30-day grace period, which expires Wednesday.

Q. What happened during the grace period?

A. Not much. The holdouts and Argentine officials have not met face to face, though both sides appeared five times at the offices of a lawyer Griesa appointed as a mediator. But Argentina is reluctant to negotiate a better deal for the holdout creditors because a clause in the renegotiated deals the other bondholders accepted would entitle them to the same payout as the holdouts. That would cost Argentina an estimated $500 billion, more than 10 times its international reserves. The clause expires at the end of this year, and Argentina would like to push back negotiations with the holdouts until after the clause ends.

Q. What’s the impact of a default?

A. Economists predict that a debt default would trigger a significant devaluation of the Argentine peso, which already has lost 25 percent of its value against the dollar this year, triggering a new round of inflation, which is already high. Many restaurants in Buenos Aires, the nation’s capital, raise their prices once or twice a year to cover inflation, and the government in July hiked prices 10 percent on a variety of staple goods. A default would also damage Argentina’s hopes to regain access to foreign credit markets, which it badly needs to finance development of a large shale oil field.

Q. Is there an impact in the United States?

A. U.S.-made products would become more expensive in Argentina, discouraging sales. But the biggest impact might be a legal one. Because so much sovereign debt is purchased in the United States, the case will set a precedent between a government negotiating its debt with a private American entity. The outcome could signal the fate of future cases between American bondholders and developing countries trying to restructure their debt.