Banking Crisis
Argentina Debt Cut To "Default" Status; Investors Are (Mostly) Calm

Financial shockwaves from Argentina’s being declared to be in default, after missing a deadline on paying debt interest, are likely to be limited, investment professionals said.
Financial shockwaves from Argentina’s declaration to be in
default, after missing a deadline on paying debt interest, are
likely to be limited, investment professionals said
yesterday.
The South American country was declared to be in default by
Standard & Poor’s, the rating agency, after it missed a deadline
on 30 June for paying $539 million interest on $13 billion of
restructured or “discount” bonds. Argentine bonds that mature in
2033 fell 6.56 cents to 89.02 cents on the dollar late yesterday
morning, according to Bloomberg.
The Merval equities index of Argentine shares was down 6.6 per
cent late yesterday morning.
Arguments about debt repayments from the country have run for
months. As an issue, it has rumbled largely in the background,
occasionally noted as a risk factor in briefing notes of fixed
income specialists but not attracting the big headlines that have
attended violence in east Ukraine or political conflict in
Thailand, for example. Investors have to some extent become
wearily familiar with the country's fiscal problems.
The country failed to make the payment after a US judge in New
York said the money could not be paid unless a group of hedge
funds holding the affected debt were also paid. The country,
media reports said, has around $200 billion in foreign-currency
debt. S&P has a “SD” rating on Argentina’s foreign currency
debt, which means the obligor, or debtor, is in default on one or
more of its obligations.
The hedge funds in the case led by Elliott Management Corp failed
to reach agreement in talks in New York, news services quoted
court-appointed mediator Daniel Pollack as saying.
UBS’s wealth management arm said in a note to
WealthBriefing that the default will hurt the domestic
Argentine economy as sovereign debt yield spreads – the gap
between Argentine and foreign debt yields – widen.
“Nevertheless, shockwaves in the emerging markets and Latin
America should remain largely contained,” UBS said.
One key issue is that of “cross-default”. According to a report
by Bloomberg, “The S&P announcement ends months of
speculation on whether the country would be able to cut a deal
with the holdouts in time to avoid a default on the country’s
bonds due in 2033. As much as $29 billion of securities are
subject to so-called cross-default clauses, allowing holders to
demand immediate repayment. The amount is equal to the country’s
foreign-currency reserves.” The report also noted that a default
raises the issue of whether, or when, buyers of credit default
swaps, a form of tradable insurance on debt, will be paid. There
may be legal argument over whether a “credit event” has occurred
that is deemed to trigger payouts on CDS contracts.
Andrew Lister, co-chief investment officer of Advance
Emerging Capital, a specialist firm, said the default is more
positive for companies in Argentina than headlines suggest.
“The technical default of Argentina is a classic example of
headlines being inconsistent with reality in frontier markets.
The Argentine market rose 11 per cent yesterday in response to
the country entering a technical default and, over the past year,
despite the anticipation of this event, the MSCI Argentina Net TR
Index has delivered an absolute return to investors of 117 per
cent in US Dollar terms,” he said in a commentary.
“Why have the markets responded so positively to this technical
default? There are several theories but in short it appears that
investors have concluded that the country entering a technical
default is more positive for companies in Argentina than the
alternatives. In addition, the attention granted to Argentina
over the past year as a result of upcoming political change
appears to have attracted investors who, on closer inspection,
have discovered Argentine equities to be highly undervalued
whilst generating strong growth despite challenging macroeconomic
conditions,” Lister continued.
“We remain positive on the long term investment case for
Argentina, but expect the market to remain volatile in the short
term. The market by any measure is cheap and offers the
opportunity for continued outsize returns, given the extremely
low base off which it is performing. Political change in 2015 is
likely to prove a further catalyst for the market once the debt
issue is resolved,” he added.