The bankers' gambit

Argentina may have found a way to default without defaulting

July 31, 2014
July 31, 2014

Today ratings agency S&P declared Argentina to be in default for the second time in 13 years, after the deadline passed for it to reach a deal with a group of its creditors. But the default may only be temporary.

As we’ve written at length, after originally defaulting on its debt in 2001, Argentina had persuaded most of its bondholders to accept a partial payment, or “haircut,” on the debt they held. But a small group of creditors held out for full payment. The US courts ruled that Argentina couldn’t pay the creditors who had accepted the haircut unless it also paid the “holdouts” in full. Today, a $539 million bond payment was due to the amenable creditors. When the deadline passed without a deal with the holdouts, it became overdue—hence the S&P downgrade.

But as the Wall Street Journal reported yesterday (paywall), Argentina’s banks were already hatching a plan to rescue the country. And according to Ambito.com, an Argentinian financial news site, the banks have indeed already reached their own deal (link in Spanish) with the holdouts. The banks will buy the holdouts’ debt, worth $1.6 billion, from them at 100% of its value, and then work out their own deal to get paid back by the Argentinian government.

The terms of such a deal aren’t clear yet. But even if it means the banks make a loss, it would probably be small by comparison with the damage that they, not to mention Argentina, would suffer from a real default. And if the deal goes through, then even though Argentina will technically already have defaulted, the default “is expected to be short-lived at this point and shouldn’t have any major implication for the country,” a Goldman Sachs analyst told Bloomberg.

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