Argentina's debt default: why does it matter?

Jul 31, 2014

Described as a battle between 'vultures' and the people, Argentina's debt default could have serious consequences

Luis Davilla/Cover/Getty Images

Argentina has officially defaulted on its sovereign debt, following the failure of last-minute talks with private bond-holders in New York. The country owes $1.3bn to a group of investors and missed yesterday's deadline to pay, after they rejected the country's latest offer in negotiations.

The country's second default in less than two decades could have wider consequences for markets, investors and the people of Argentina. 

How and why has Argentina defaulted on its debt?

Argentina's current financial crisis stems from 2001 when Argentina first defaulted on $100bn worth of debt, the largest-ever sovereign default at the time. Private investors then bought large amounts of this debt at a low price.

Argentina then began a process of debt restructuring in an attempt to reduce the amount it owed through renegotiation. However, only 93 per cent of the creditors agreed to the restructuring, with the remaining seven per cent becoming "hold-out" bondholders.

Last month, a US judge ruled that if does not pay these "hold-outs" it cannot make any further payments to the restructured bondholders, explains CNN Money.

The hedge funds that own the debt have demanded interest payments from Argentina, despite buying them "at less than face value", says the BBC.

After defying the "hold-outs" for years, paying them now "could undermine the standing of the Argentinean president Cristina Fernandez de Kirchner", the New York Times reports. 

Why does it matter?

President Kirchner has called these bond-holders "vultures", accusing them of capitalising on her country's debt problem. This ongoing crisis is viewed as a battle between these "vultures" and the people of Argentina.

"At the heart of this is a feeling that Argentina has been treated badly by the international financial system," says the BBC's South America business reporter, Kate Watson. The country's finance minister, Axel Kicillof has made the point "that the vultures always win and the people lose". 

What happens next?

"The full consequences of a default are not predictable, but they certainly are not positive", Daniel Pollack, the court-appointed mediator between Argentina and the bondholders, tells the BBC.

Defaulting "should free up cash resources to serve other immediate financial liabilities" says Emiliano Surballe, a fixed income analyst at the Swiss private bank Julius Baer. "However, it would completely shut down access to foreign funding," he tells The Guardian.

The cost of borrowing is now "likely to rise to punishing levels for state institutions and the private sector", the Financial Times reports.

CNN Money predicts that Argentina could also be forced to devalue its currency, which could set off another increase in inflation, already predicted to reach 40 per cent.

In 2002, dozen were killed in riots in response to the economic crisis and the country's default. The events ultimately led to the resignation of the country's president, Fernando de la Rua. With the implications of this latest default, "social unrest is a possibility", says Carlos Caicedo, senior analyst for Latin America at IHS.

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