Argentina’s Abnormal Default Still Hurts as Losses Swell
Argentina’s default last month may not have looked or felt like a typical sovereign debt debacle, but that doesn’t mean bondholders have escaped scot-free.
No developing nation’s bonds have lost more value this month than Argentina’s, according to a JPMorgan Chase & Co. index of dollar-denominated debt. The country’s benchmark notes have slumped 16.07 cents to 79.51 cents on the dollar since a legal standoff with holdout creditors from a previous default blocked the distribution of an interest payment due by July 30.
While that bond’s price tag is about three times higher than the 26-cent-on-the-dollar norm following sovereign defaults, it is still inflicting losses on investors who piled into Argentine debt last month in a bet that a deal would be struck to break the legal impasse. In the four weeks since the $539 million payment was missed, negotiations between banks, investors and the holdout creditors, who are led by Elliott Management Corp., have failed to yield an agreement.
“Investors had initially hoped that there would be a relatively quick resolution,” said Jorge Piedrahita, the chief executive officer of Torino Capital LLC, a New York-based investment bank that specializes in emerging markets. “Now it’s looking like that might not be the case.”
According to a Moody’s analysis of defaults going back to 1998, the average price for government securities 30 days after a missed payment or during a debt swap was 26 cents.
Argentina’s legal dispute stems from its record $95 billion default in 2001. While 92 percent of creditors accepted discounts of 70 percent in restructurings in 2005 and 2010, hedge funds including billionaire Paul Singer’s Elliott sued for better terms, eventually winning a ruling to be paid in full.
U.S. District Judge Thomas Griesa blocked the country from making payments on bonds until it also pays the hedge funds about $1.6 billion.
President Cristina Fernandez de Kirchner, whose term ends in 2015, announced a plan Aug. 19 to circumvent the order by paying foreign bonds through a local trustee, while also offering investors a swap into identical bonds issued under Argentine law. The local debt bill passed a lawmaker commission Aug. 27 and will be debated by the Senate on Sept. 4.
Griesa has called the proposal “illegal.” That may make it difficult for investors and financial intermediaries to participate without risking being held in contempt of court, according to Claudia Calich, who helps oversee $1.5 billion of emerging-market assets at M&G Ltd. in London. Those could include bond trustees, banks and clearinghouses.
“I cannot imagine there’s going to be a tremendous amount of acceptance,” Calich said by phone the day after Fernandez disclosed the proposal.
In the black market, the peso weakened to a record low 14.38 per U.S. dollar on Aug. 27, the day before Argentina suffered its second national strike in five months. Truckers, train conductors, port workers and waiters walked off their jobs yesterday in a 24-hour strike to demand higher wages to combat inflation and protest dismissals.
Jefferies Group LLC estimates that the benchmark Argentine bonds could plunge to 60 cents on the dollar if the default is prolonged and there’s an erosion of central-bank reserves that the government uses to make debt payments.
“The default won’t be fixed quickly,” Torino’s Piedrahita said.
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