Argentina’s Default Clock Runs Out as Debt Talks Collapse.

http://www.bloomberg.com/news/2014-07-31/argentina-s-default-clock-runs-out-as-debt-talks-collapse.html

With Standard & Poor’s saying Argentina is in default and last-minute plans to remedy the situation falling through, investor focus is turning to whether holders of $29 billion of bonds will demand immediate repayment.

The nation missed a deadline yesterday to pay $539 million in interest after two full days of negotiations in New York failed to produce an accord with creditors from its last default in 2001. A U.S. judge ruled that the payment couldn’t be made unless those investors, a group of hedge funds led by Elliott Management Corp., got the $1.5 billion they claimed.

As Economy Minister Axel Kicillof returns to Buenos Aires with no set plans for further discussions with the hedge funds he described as “vultures,” other creditors must decide whether to invoke a clause that entitles them to demand their money back. While an 11th-hour attempt last night by a group of Argentine banks to avert a crisis by purchasing the securities from Elliott fell through, bondholders probably will give the parties more time to reach a settlement, according to Bank of America Corp.

“It’s in their best interest to delay acceleration and not introduce more difficulties,” Jane Brauer, a strategist at Bank of America, said by phone from New York. “The best thing for Argentina to do is to continue seeking a solution.”

Argentina has about $29 billion of bonds sold in international markets and denominated in foreign currencies with so-called cross-default provisions. Under their terms, Argentina would have to pay back the entire balance -- plus unpaid interest -- if at least 25 percent of holders demand that their money be returned. The potential liabilities are equal to the country’s foreign reserves, which are already hovering close to an eight-year low.

Previous Swaps

S&P’s declaration came after the expiration yesterday of a 30-day grace period on the original June 30 payment deadline. If Argentina is able to figure out a way to make its debt payments, the ratings could be revised “depending on our assessment at that time of Argentina’s residual litigation risk, its access to international debt markets and its overall credit profile,” S&P said.

RUFO Clause

He said Argentina couldn’t pay the $1.5 billion verdict to the hedge funds because doing so would require the country to similarly sweeten terms for investors who went along with the country’s debt restructurings in 2005 and 2010 and got 30 cents on the dollar. That stipulation, known as the RUFO clause, could trigger claims of more than $120 billion, the country has said.

Real Suffering

The economy, already headed for its first annual contraction since 2002 amid 40 percent inflation, will suffer in a default scenario as Argentines scrambling for dollars cause the peso to weaken and activity to slump, according to Hernan Yellati, the head of research at Banctrust & Co.

Step Backward

The country also changed its methodology for calculating inflation statistics after being faulted by the International Monetary Fund for flawed reporting.

Missing the debt payments represent a step backward in those efforts, according to Marco Santamaria, a New York-based money manager at AllianceBernstein, which oversees $25 billion of emerging-market debt. Argentina hasn’t issued global bonds since the default in 2001.

“A lot of the goodwill and positive signals that had come out of Buenos Aires are going to be diluted,” he said.

Traffic on Avenida 9 de Julio in downtown Buenos Aires, Argentina.