How Argentina wound up in another default mess
On July 30, Standard & Poor's declared Argentina in "selective default" after last-ditch talks with bond creditors failed. This is its second default in 13 years, and this default is directly related to the previous one. Although negotiations between the two sides have halted, debt insurance prices failed to rise significantly on Thursday, suggesting investors still think a deal could be reached.
How did things come to this, and what might happen next? Here are answers to those and other questions.
How did this all begin?
In the 1990s, following a period of hyperinflation, Argentina was running a huge deficit and sold bonds to finance its government. The bonds were in U.S. dollars and issued under New York state law, meaning any disputes about the bonds would have to be settled in U.S. courts. Unfortunately for Argentina, its economy didn't improve much, and it defaulted on those bonds in 2001, when it could no longer sustain its debt burden.
In 2005 the country agreed to two exchanges in which investors gave up their old bonds and got new ones, some of which were worth as little as a fourth of the value of the original securities. Some 93 percent of bondholders accepted the offer. The ones who didn't, mostly hedge funds, are called the "holdouts."
Since then, Argentina has made all its payments to those who accepted the offer (the "holdins") but refused to make payments those who did not. Once Argentina made began making payments, one of the holdouts, Elliott Management run by Paul Singer, sued in New York courts to get 100 percent repayment of the original bonds.
How did the courts rule?
Two years ago, New York judge Thomas Griesa ruled in favor of Elliot. Argentina then appealed that ruling to the U.S. Supreme Court, which in June declined to hear the case, meaning Judge Griesa's ruling was the final decision in the case.
How much does Argentina owe Elliot Management?
$1.5 billion.
Why doesn't they just pay it?
While the nation could pay that amount, there might be severe ramifications if it does. For one thing, the other holdouts would also seek payment under the same terms, which would cost Argentina about $11.5 billion more. Again, it could afford to pay this amount, but it might trigger a clause in the holdins' bonds forcing them to be paid the full amount they are owed as well.
How much are they owed?
Some estimates put it in excess of $200 billion. Paying even close to that amount would wipe out Argentina's foreign reserves and throw its already troubled economy into a crisis.
What happens if Argentina doesn't pay?
The national government hasn't been able to borrow internationally since 2001, so little would change for it directly. However, Argentine companies and institutions have been able to get credit from foreign markets, and they would face huge increases in the amount of interest they have to pay to get loans. Among those most effected would be several indebted provinces and YPF, the state oil company, which hopes to develop Argentina's huge Vaca Muerta shale formation.
Has anything like this happened to Argentina before?
This is the eighth time the country has defaulted since its founding in 1816.
