Banking Crisis

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

Tom Burroughes Group Editor London 1 August 2014

Argentina Debt Cut To

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.

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