Ratings agency Standard & Poor’s has placed Argentina’s credit rating on “selective default” after the South American country failed to make a US$539 million interest payment to holders of bonds bought in 2001.
The default may push Argentina into economic turmoil, forcing the country to devalue its currency which is already on a steep decline. Analysts warn that devaluation may stoke inflation that is already hovering at 40%.
According to some reports, the default could trigger bondholder claims of as much as US$15 billion to US$20 billion because of cross-default clauses.
For Argentina, this is the second default in 13 years. This time the default comes two months after a U.S. court ruled that Argentina must pay the bondholders in full.
At a press conference in New York on Wednesday night, Argentina’s Finance Minister Axel Kicillof confirmed that he could not cut a deal with the bondholders.
Eric LeCompte, executive director of the religious debt relief group, Jubilee USA Network, has expressed concern at Argentina’s default. “It’s unfortunate that it came to this. Argentina never would have defaulted and hold-outs would have been forced to sit at the table if we had an international bankruptcy process in place,” he said.
“These predatory actors are only able to operate because our financial system is too much like the Wild West,” LeCompte added.
Argentina successfully persuaded most of its bondholders to accept a nearly 70% reduction in the value of their investment. More than 92% of creditors agreed to the offer, but a small number of hedge funds refused and sued the government in the U.S. courts.
The South American country says the funds bought most of the debt at a deep discount and paying off such huge sums will push its economy back into a turmoil.
The U.S. court ruled that if Argentina doesn’t pay the hedge funds (holdouts), it can’t make any more payments to restructured bondholders. That put Argentina in a difficult position, leading it to default on its payment.
Argentina makes up less than 2% of the JPMorgan emerging markets bond index. This means its economic troubles are less likely to have a knock-on effect on neighboring countries.