Tags: Argentina | Debt | Stocks | Uncertainty

Default Fuels Uncertainty, Stock Drop in Argentina

Thursday, 31 July 2014 07:14 PM

Stocks fell sharply in Argentina on Thursday as the country entered into economic uncertainty with its second default in 13 years, one forced upon it by New York hedge funds with the backing of U.S. courts.

The Merval stock index closed down more than 8 percent a day after Argentina walked away from talks in New York, where a court-appointed mediator led negotiations with U.S. hedge funds demanding some $1.5 billion.

Economy Minister Axel Kicillof made it clear that Argentina and the holdout creditors remain far apart — he and other officials refuse to concede that the country is even legally in default. But he told reporters that he was nevertheless open to further talks involving a court-appointed mediator.

"We remain open to dialogue," Kicillof said.

Argentine shares had rallied on Wednesday when a group of private Argentine bankers announced it would offer to buy up the disputed debt. Such a deal would have enabled Argentina to make a late interest payment owed to a separate group of bondholders, which would have allowed it to avoid default.

"The stock exchange is falling heavily because it was, in the end, surprised by the fact that negotiations yesterday were frustrated," said Belen Olaiz, an economist with ABECEB.com Consultants in Buenos Aires.

Olaiz said some investors may also have been spooked by Kicillof's sharp criticism of the hedge fund investors, raising worry the dispute is far from resolution. Speaking to reporters after the collapse of talks, Kicillof repeatedly referred to the investors as "vultures" and called their demands "extortion."

Fitch Ratings cut its credit ratings for Argentina on Thursday following the lead of Standard & Poors. The eighth default in Argentina's history did not seem to rattle global markets, largely because investors have been well aware of Argentina's problems since its record $100 billion default in 2001. Traders had also been preparing for a worst-case scenario before the talks fell apart, and many still hope a deal will be struck.

"The markets already sold off a fair amount before the news late yesterday night that we were definitely going into a default scenario," said Alberto Ramos, who analyzes Argentina for Goldman Sachs. "But now, there's still the possibility that some deal is reached between the holdouts and some private entity."

If a private group were to buy the debt, he said, that could lift a court order blocking Argentina from paying $539 million in interest due to bondholders "and the default can be cured rather rapidly."

Argentina's options to satisfy the hedge funds are limited until at least the end of the year. That's when a clause in its 2005 and 2010 debt-restructuring agreements will expire, freeing it from an obligation to pay those earlier bondholders terms equivalent to whatever deal it may reach with the hedge funds. Violating that clause, Argentina says, could make it liable to claims of more than $109 billion.

Ordinary Argentines seemed to take the default in stride, having grown used to difficulty. Although they feel the pressure on the frail economy, they say it's not as bad as the crisis of 13 years ago, when one of every five Argentines was out of work and some reported going hungry. At least 27 people died in protests and Argentina saw a revolving door of five presidents in two weeks.

"Until the end of the year, it's going to be a very bad period and after that I think at least that they will have come to some agreement ... But, well, here we are used to it," said Antonio Emilio a 68-year-old resident of the capital.

President Cristina Fernandez was expected to address the nation later Thursday and the judge presiding over the legal dispute in New York had scheduled a meeting for Friday.

"At some point, this has to get resolved. It could be weeks or months or next year when there's a new government. The sooner, the better of course," said Gorky Urquieta, who manages $3.1 billion as co-head of emerging-market debt at Neuberger Berman. He has a variety of Argentine government bonds, including some that defaulted yesterday.

"Somebody, whether it's this government or the next one, will understand that cleaning up this mess and gaining access to international capital markets is only to their benefit," Urquieta said.

Kicillof has held firm to his government's position that it could not accept a deal that "jeopardizes the future of all Argentines," saying any immediate effects will be minimal.

Court-appointed mediator Daniel Pollack said a default could hurt bondholders who were not part of the dispute as well as the Argentine economy, which is suffering through a recession, a shortage of dollars and one of the world's highest inflation rates.

"The full consequences of default are not predictable, but they are certainly not positive," Pollack said.

The holdouts, led by NML Capital Ltd., blamed Argentina for the failure to reach an agreement. In a statement, the hedge fund run by New York billionaire Paul Singer said the mediator had proposed "numerous creative solutions," to resolve the standoff.

"Argentina refused to seriously consider any of them, and instead chose to default," it said.

The hedge funds spent more than a decade litigating for payment in full rather than agreeing to provide Argentina with debt relief. They also sent lawyers around the globe trying to force Argentina to pay its debts and were able to get a court in Ghana to temporarily seize an Argentine naval training ship. The threat of seizures forced Fernandez to stop using her presidential plane and instead fly on private jets.

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Stocks fell sharply in Argentina on Thursday as the country entered into economic uncertainty with its second default in 13 years, one forced upon it by New York hedge funds with the backing of U.S. courts.The Merval stock index closed down more than 8 percent a day after...
Argentina, Debt, Stocks, Uncertainty
Thursday, 31 July 2014 07:14 PM
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