Argentina default appears to see default as the less costly option, according to Principal Latin America Analyst Carlos Caicedo at IHS Country Risk.
“Argentine authorities seem to have reached the conclusion that to default now and renegotiate later would the less costly option. Argentina’s $539 million payment to exchange bondholders is due today (30 July). Although Argentina is ready to pay, it has been prevented from doing so by a US-based judge ruling, which states that this payment can only be done if at the same time it pays $1.3 billion to holdout creditors. The latter refused to accept debt restructuring following the 2001 debt default and after long litigation have now secured a favourable ruling from the US judge.
If Argentina does not choose to default and opts to pay the holdout creditors, this carries the risk that those bondholders that agreed to restructure defaulted debt in 2005 and 2010 would demand a similar treatment. It is worth noting that those that join the debt restructuring agreed to a 70% haircut. Such a payment would exceed Argentina’s current reserves of about $29 billion.
The only possibility to avoid default now is for the holdouts to request the judge to put the ruling on hold. If the judge does that, Argentina would be able to pay the exchange bondholders what is due to them on 30 July, avoiding default. Argentina is adamant that only under these circumstances – a stay on the ruling – would consider negotiations with the holdouts.
Consequences of default:
1) Access to foreign financial markets would be delayed: Argentina’s main motivation behind recent agreements with Repsol and Paris Club was to regain access to foreign capital markets; this would be severely delayed. This is critical at a moment when the economy is in recession and Argentina desperately needs fresh sources of funding. Conversely, a positive outcome with the holdouts would see a surge in FDI; some observers put this at as much as $5 billion a year, so the opportunity cost is very high. Foreign investors are waiting in the wings.
2) Provincial debt default risk would increase markedly: the chances of heavily indebted provinces to issued dollar-denominated bonds would disappear.
3) Devaluation: The recession and the pressure on the reserves mean that Argentina would likely implement devaluation as that implemented in January 2014. This would exacerbate inflation, which is already very high.
4) Tainted legacy of President Fernandez: A default would taint President Cristina Fernandez de Kirchner’s legacy, but most important it would seriously damage the chances of any presidential candidate being sponsored by her. A group of leaders who received a country in default in 2003 and defaulted 11 years later are certain to be punished by voters.”