Case study on Sovereign Debt (Argentina)

[CityFarmer]

Argentina defaulted...

Argentina braces for market reaction to second default in 12 years

BUENOS AIRES - Argentina defaulted for the second time in 12 years after hopes for a midnight deal with holdout creditors were dashed, setting up stock and bond prices for declines on Thursday and raising chances a recession could worsen this year.

After a long legal battle with hedge funds that rejected Argentina's debt restructuring following its 2002 default, Latin America's third-biggest economy failed to strike a deal in time to meet a midnight deadline for a coupon payment on exchange bonds.

Even a short default will raise companies' borrowing costs, pile more pressure on the peso, drain dwindling foreign reserves and fuel one of the world's highest inflation rates.

"It is going to complicate life for businesses like YPF which were going to look externally for financing," said Camilo Tiscornia, a former governor of Argentina's central bank. State-controlled energy company YPF needs funds to develop Argentina's huge Vaca Muerta shale formation.
...
http://www.todayonline.com/business/arge...t-12-years

[CityFarmer]

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).

Vulture in our context means "a person who tries to take advantage of someone who is in a very bad situation".

I wouldn't conclude the hedge funds are vulture, even as third-parties, after risk-adjusted. Those will lend with super-high interest on future debt, are the "vulture", IMO

[kelvesy]

Some indexes have fallen, hope will gradually recover.

http://www.marketwatch.com/

[specuvestor]

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).

Vulture in our context means "a person who tries to take advantage of someone who is in a very bad situation".

I wouldn't conclude the hedge funds are vulture, even as third-parties, after risk-adjusted. Those will lend with super-high interest on future debt, are the "vulture", IMO

They are kicking a "person" while he is down or dying to take advantage of him. That is either the act of a bully or vulture. Financial purist has an amoral opinion as long it makes financial sense, but I think making a whole populace suffer is probably beyond reasonableness

Read that if the pari passu clause kicks in just because they need to pay off the vultures, the debt liable will increase to the foreign reserve of Argentina. Unlikely Argentina will budge without a restructuring deal

[CityFarmer]

The market first reaction on the default, more will come...

Argentine markets fall post-default, New York hearing on Friday

BUENOS AIRES - Argentina's bond and stock markets and peso currency dropped on Thursday after Latin America's No. 3 economy defaulted for the second time in 12 years following the collapse of last-ditch talks with holdout creditors.

The default came after Argentina failed to strike a deal with lead holdout investors NML Capital Ltd, an affiliate of Elliott Management Corp and Aurelius Capital Management, in time for a midnight Wednesday EDT (0400 GMT) payment deadline.
...
http://www.todayonline.com/business/arge...t-12-years

[weijian]

The hedgies live up to their name, as they are suspected of buying CDS against the Argentinian bonds...Heads i win, tails you lose.

http://www.bloomberg.com/news/2014-08-01...uling.html

Argentine Bonds Decline as Default Triggers $1 Billion of Swaps
..............................
'Vulture Funds’

Economy Minister Axel Kicillof called the so-called holdout creditors led by Elliott “vulture funds” this week after failing to reach a restructuring agreement with them to settle claims over the debt they own that Argentina defaulted on in 2001. Kicillof said he suspected Elliott held credit swaps, a market that he said clouds the motives of creditors while leading to “the most wretched speculative capitalism.”

Many bond buyers own credit swaps as protection against losses. The dual roles can skew incentives because creditors will sometimes stand to profit more from a swaps payout than an issuer actually meeting its debt obligations.

Argentina will investigate whether the holdouts’ failure to reach agreement on the debt case was part of a “maneuver” to profit from payouts on the credit-default swaps, the Economy Ministry said in an e-mailed statement on Aug. 1. Local regulators will ask the U.S. Securities and Exchange Commission to help the country establish if hedge funds, either by themselves or through third parties, benefited from the triggering of CDS, according to the statement........

[specuvestor]

This crisis is very different from the rest if people understands the details. Effectively it is hedgies taking an entire country hostage and bringing miseries to millions so that they can make say $500m while making Argentina be liable for scores of Billion$

By Daniel Cancel and Camila Russo
Aug. 1 (Bloomberg) -- Argentina’s President Cristina
Fernandez de Kirchner denied the country defaulted on its debt
in her first public comments since Standard & Poor’s said the
nation had done just that for the second time in 13 years.
Fernandez said in a televised speech yesterday that while
she’s open to further talks with hedge funds that successfully
sued her government for $1.5 billion, she must defend the
nation’s interests. Paying them could trigger additional claims
and ruin Argentina, she said. While the country had posted a
$539 million interest payment for bondholders prior to the July
30 deadline, a U.S. judge said it couldn’t be distributed
because the hedge funds also had to be paid.
Argentina’s bond prices tumbled yesterday along with the
country’s benchmark stock index after S&P said the blown
deadline was enough to constitute default on about $13 billion
of debt. Moody’s Investors Service placed the country’s rating
on negative outlook. Officials have distinguished the episode
from the $95 billion default in 2001 that took place amid four
straight years of economic contraction. Fernandez said a blocked
debt payment doesn’t constitute a default.
“This situation isn’t even contemplated in bond
contracts,” Economy Minister Axel Kicillof said yesterday in
Buenos Aires, after returning from talks with the hedge funds in
New York before a court-appointed mediator. “Argentina has all
legal recourses to show that this isn’t a default,” he said,
adding that arguments to the contrary amounted to “atomic
silliness.”

http://www.bloomberg.com/news/2014-08-01...-sink.html

[CityFarmer]

More update on the CDS...

Argentina to investigate if debt case biased by holdout speculation

BUENOS AIRES - Argentina's economy ministry said on Friday it had asked the national securities watchdog to investigate whether litigation in the United States against the nation by holdouts was merely the "facade of speculative manoeuvre in favour of vulture funds."

The ministry said the watchdog should investigate whether the holdouts litigated simply to earn profit on defaulted bonds they bought on the cheap as well as on credit default swaps (CDS), derivatives used to insure against default.
...
http://www.todayonline.com/business/arge...peculation

[Art or Science]

For those who want to have a quick understanding of Argentina's latest default, I have pasted 2 urls..

Argentina had 8 defaults since 1816.. And its inflation is 35-40% ? how to get out of this ....hole

http://www.cbsnews.com/news/q-a-the-arge...explained/

https://mises.org/daily/6825/Understandi...ng-Default

[greengiraffe]

US 'vulture fund' forces debt default by Argentina

Date
July 31, 2014
Read later
Peter Eavis and Alexandra Stevenson


Argentina approaching another default
Argentina and holdout creditors failed to reach a debt deal, bringing the country closer to another default.

New York: The hedge fund firm of billionaire Paul Singer has about 300 employees, yet it has managed to force Argentina, a nation of 41 million people, to default on its debt for the second time in 13 years.

Argentina failed to make scheduled payments by midnight, Wednesday, New York time on its government bonds. The country has the money to pay the bonds, but a US federal court in Manhattan has ruled that unless Argentina settles its debt dispute with Mr Singer's firm, Elliott Management, it is barred from paying its main bondholders.

After more than five hours of meetings Wednesday, the sides failed to reach an agreement and the court-appointed mediator said that Argentina would "imminently be in default." Because a $US539 million ($578 million) interest payment was not made, the ratings agency Standard & Poor's said that Argentina was in default on those bonds.

The man who made Argentina default. Paul Singer, president of hedge fund Elliott Management.
The man who made Argentina default. Paul Singer, president of hedge fund Elliott Management. Photo: Bloomberg
The government of Argentina now faces a stark choice: try to restart negotiations with investors it has repeatedly called "vultures", who have for years refused to accept anything other than full repayment. Or it can remain ensnared in a default that could weigh on the country's fragile economy and unsettle global markets.

After the talks collapsed, the economy minister of Argentina, Axel Kicillof, characterised the negotiations as extortion.

"We're not going to sign any deal which compromises the future of Argentines," he said at a news conference in Manhattan.

Axel Kicillof, Argentina's economy minister, addresses the media in Manhattan on Wednesday. He has described hedge funds that hold Argentine debt as 'vultures'.
Axel Kicillof, Argentina's economy minister, addresses the media in Manhattan on Wednesday. He has described hedge funds that hold Argentine debt as 'vultures'. Photo: AP
While Mr Singer's firm has yet to collect any money from Argentina, some debt market experts say that the battle may already have shifted the balance of power toward creditors in the enormous debt market that countries regularly tap to fund their deficits. Countries in crisis may now find it harder to gain relief from creditors after defaulting on their debt, they assert.

"We've had a lot of bombs being thrown around the world and this is America throwing a bomb into the global economic system," said Joseph Stiglitz, the Nobel-prize winning economist and professor at Columbia University. "We don't know how big the explosion will be - and it's not just about Argentina."

Having bought its Argentine bonds for well below their original value, Mr Elliott stands to make a killing if Argentina pays the bonds in full. Legal filings indicate that the face value of its Argentine government bonds was around $US170 million, but the firm most likely acquired many of them for much less than that. Mr Elliott and other investors are now seeking more than $US1.5 billion, which includes years of unpaid interest.

New York Times