Case study on Sovereign Debt (Argentina)

[LionFlyer]

I am wondering, when a country defaults on its obligations, what is the wider impact to the global economy? On a country level, credit/debt ratings will go down, affecting the cost of borrowing. I suppose as a country, you will end up with lesser economic activities since interest rates will go up corresponding among other things like risk premiums. But how about toward the global economy? Argentina is not exactly an exporter.

[corydorus]

Argentina ? Hardly a dent to the world economy imo. I remembered they got hit with Hyper-Inflation once but rest of world hardly get impacted. There is another Legal issue happening in Europe which requires Russia to compensate shareholders related to the seizure of a large Oil company. The implication will be of interests considering Putin will not swallow that easily without a thug fight.

[LionFlyer]

Thanks. I also think on paper, Argentina default does not seem to have a wider impact other than making the people's life in the country miserable.

But how does something like this (Mexico, or 1997) spread when the economies concerned are just a small portion of the global economy?

[specuvestor]

^^ yea it's about contagion and domino effect just as Greece and Thailand

Brazil is the anchor of South America and why I am more concern is because this default is happening in the midst of the lowest interest rate environment ever and at the inflexion point for interest rate increase

[CityFarmer]

Argentina gov is enlarging the issue, from local, to region, or even a global issue...

South American leaders rally behind Argentina over debt

CARACAS - South American leaders have rallied behind Argentine President Cristina Fernandez, who is locked in a legal battle with holdout investors that could trigger a debt default this week.

The standoff figured prominently at the Mercosur bloc's meeting in Caracas on Tuesday, with heads of state castigating the holdouts as speculators menacing the entire region.

Argentina has until late Wednesday to either pay out or reach a deal with the hedge funds that are suing for full payment on their bonds to avert a second default in little over a decade in Latin America's No. 3 economy.
...
http://www.todayonline.com/business/sout...-over-debt

[CityFarmer]

The last-ditch effort failed. The proposal to shift the gov debt to private bank, might reduce the future negotiation power of the hedge funds.

Argentina fails to reach debt agreement, default looms

BUENOS AIRES/NEW YORK - Argentina failed to strike a deal to avert its second default in more than 12 years after talks with holdout creditors ended without a settlement on Wednesday.

The country's economy minister, Axel Kicillof, speaking at a news conference at the Argentine consulate in New York, repeatedly referred to the holdout hedge funds as "vultures" after two days of talks failed to produce an agreement.

"Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default," Daniel Pollack, the court-appointed mediator in the case, said in a statement on Wednesday evening.
...
http://www.todayonline.com/business/time...bt-default

[LionFlyer]

I have a question; is it really because Argentina does not have the reported USD $1.5 billion to pay these holdouts or is it just political posturing against the imperialists Yankees?

[CityFarmer]

I have a question; is it really because Argentina does not have the reported USD $1.5 billion to pay these holdouts or is it just political posturing against the imperialists Yankees?

Argentina borrowed from those hedge funds' managers, and defaulted. The managers are claiming their money now, and become vultures?

It is not different from lending money to friends and families, once defaulted, you become the bad guy.

[specuvestor]

AFAIK the traditional funds that held the debt bailed out and took haricut while these hedge funds bought the debt on the cheap and demand to be paid in full as they did not agree with the restructuring. So yeah they are vultures

Problem with Argentina is is Pari Passu clause which means they have to pay everyone on same terms. I'm not sure what is the technical covenant involved but that is roughly the main issue as the vultures owned >25% of the debt

http://ftalphaville.ft.com/2014/07/31/19...s-dilemma/

[LionFlyer]

Argentina borrowed from those hedge funds' managers, and defaulted. The managers are claiming their money now, and become vultures?

It is not different from lending money to friends and families, once defaulted, you become the bad guy.

I am not disputing those facts, but whether their inability to repaid those debts is real or not.

Yes, those hedge funds are vultures as you have pointed out (buying cheap debt and now asking for full repayment + interest) hence I am wondering is Argentina just trying to make a point not to pay (as opposed to a real lack of cash).