How Costly Would Argentine Default Be?

Default on Argentina's bonds may trigger $29 billion in claims, as much as all its foreign-currency reserves.

By defaulting tomorrow, Argentina may trigger bondholder claims of as much as $29 billion—equal to all its foreign-currency reserves.

If the overdue interest on Argentina’s dollar-denominated securities due 2033 isn’t paid by July 30, provisions in bond indentures known as cross-default clauses would allow the nation’s other debt holders to also demand their money back immediately. The amount corresponds to Argentina’s debt issued in foreign currencies and governed by international laws.

U.S. District Court Judge Thomas Griesa blocked Argentina’s attempt last month to transfer the $539 million in interest after the nation didn’t set aside money for holdout creditors who won a ruling that entitled them to full repayment of obligations that Argentina repudiated in 2001. While Citigroup Inc. says there’s little chance investors will invoke the payback clauses in coming weeks, potential claims are large enough to exhaust the country’s reserves.

“It would mean that Argentina is in default on most all of its debt, and presumably everybody would be in the same boat,” Anna Gelpern, a fellow at the Peterson Institute for International Economics and a law professor at Georgetown University, said in a telephone interview.

Tomorrow is the last day Argentina has to avoid its second default in 13 years by making the interest payment to holders of $13 billion of bonds before a 30-day grace period expires.

In a default—even a temporary one—the Argentine economy will contract and the odds of a crisis are high, according to Marcos Buscaglia, an economist at Bank of America Corp. Money demand will become unstable as Argentines scramble for dollars, causing the peso to slump, he wrote in a report today.

“Argentina’s current weak fiscal, monetary, and external conditions make the probability of the situation spinning out of control quite high,” he wrote. “Argentina’s payment capacity should not be taken for granted if it defaults.”

Even though trading in the bonds suggests investors don’t foresee an imminent catastrophe, the nation could still be on the hook for billions of dollars in immediate repayment.

Based on the cross-default clauses, Argentina would have to pay back the entire balance—plus unpaid interest—of any security if holders of at least 25 percent of that debt demand that their money be returned.

 

$95 Billion

While Argentina deposited the interest due on the 2033 bonds last month, Griesa has prevented the custodian firms from transferring the money until Argentina pays the holdouts led by billionaire Paul Singer’s Elliott Management Corp.

The dispute stems from Argentina’s record $95 billion default in 2001. While most of the debt was swapped for new bonds in 2005 and 2010, with holders accepting losses of about 70 percent, the holdouts were among the 7 percent who rejected the terms and sued to reclaim all principal and unpaid interest.

President Cristina Fernandez de Kirchner’s government says it needs to delay the ruling until January, after the expiration of a Rights Upon Future Offers clause that’s supposed to keep it from voluntarily giving better terms to the holdout creditors without extending the same offer to exchange bondholders.

Cabinet Chief Jorge Capitanich said today that Argentina has serviced its debt and won’t default. Restructured bondholders should claim their interest payments in U.S. courts, he told reporters in Buenos Aires.

In a meeting last week with court-appointed mediator Daniel Pollack, Argentina called on the judge to create a safeguard against risks related to the RUFO clause, which the country has said may trigger claims of more than $120 billion. Griesa has rejected Argentina’s repeated pleas for a delay.

Credit-default swaps that protect against losses from an Argentine default over the next three months imply a 43 percent chance of non-payment, according to data compiled by CMA. The South American nation’s debt is the most expensive in the world to protect with the swaps.

“If payments are missed for a few days, or even a couple of weeks, acceleration is unlikely to happen,” Citigroup analysts Guillermo Mondino and Jeff Williams wrote in a July 25 report. If bonds subject to cross-default are accelerated, Argentina would still have 60 days to pay the original bonds and declerate the notes, they said.

At 82.96 cents on the dollar as of 11:12 a.m. today in New York, the bonds due 2033 are trading above their 74-cent average of the past five years.

 

RUFO Clause

Average yields on Argentina’s bonds were 9.7 percent yesterday. Borrowing costs for the South American country were about four times higher when former President Adolfo Rodriguez Saa halted debt payments on Dec. 24, 2001.

Many investors assume that “the default will be cured after the RUFO clause expires, so the degree of panic isn’t great,” Michael Roche, an emerging-market strategist at Seaport Group LLC, said in a telephone interview.

Other investors speculate that Fernandez might be able to swap investors into local-law bonds outside of Griesa’s jurisdiction, and thus continue paying if there’s a default.

A jurisdictional swap “would gut the legal bite” of Griesa’s ruling, said Carlos Abadi, chief executive officer of New York-based investment bank ACGM Inc.

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