Today, after heated negotiations in a midtown law office, Argentina failed to reach an agreement with several hedge funds holding its bonds, and it defaulted on its debt payments. First, S&P lowered the country’s rating to “selective default,” which means that Argentina had failed to make some interest payments on its bonds. Then Argentina’s economy minister, a rather casual-looking fellow named Axel Kicillof, said that the “vulture” hedge funds had declined to accept Argentina’s offer to swap out their bonds for new ones and that he was therefore heading home. Three thoughts:
1) While the market has behaved, somewhat inexplicably, as if the threat of default wasn’t real, and that even if it did happen the consequences would be minor, economic default is a serious matter for the people of Argentina. As the court-appointed mediator in the dispute, Daniel Pollack, an attorney at McCarter & English, put it in a statement: ”Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default.” He went on: “Default is not a mere ‘technical’ condition, but rather a real and painful event that will hurt real people: these include all ordinary Argentine citizens, the exchange bondholders (who will not receive their interest) and the holdouts (who will not receive payment of the judgments they obtained in court). The full consequences of default are not predictable, but they certainly are not positive.”
2) Economy Minister Axel Kicillof did not engender confidence during his press conference at the Argentine consulate in New York after the talks fell apart. Rather, he left the impression that Argentina barely negotiated at all, offering only to agree to postpone the deadline for a settlement and offering the holdout bondholders the option to trade in their bonds at terms offered to those who participated in the restructurings in 2005 and 2010—the very terms the holdout investors have been fighting for years now. “We will not sign any agreement that compromises the country’s future,” Kicillof said. Also: “We consider the situation is unfair.”
3) Overlooked is that this case may set a precedent with far-reaching global consequences. It proves that a handful of hedge funds may be able to impede the ability of countries around the world both to borrow money and to renegotiate the terms of their loans if they fall into economic crisis. Considering how many nations in Africa, Latin America, and elsewhere are under the control of corrupt regimes that may borrow funds only to saddle their people with crippling debt, this is is an alarming development.