It's the end of Argentina as we know it, and the world economy will be just fine . / GUARDIAN. Argentina defaults as last-minute talks fail / FINANCIAL TIMES.

It's the end of Argentina as we know it, and the world economy will be just fine

An entire country defaulting on its debt? After a fight with US hedge-funders? This is the stupidest ‘nuclear option’ yet

Heidi Moore

theguardian.com, Wednesday 30 July 2014 / http://www.theguardian.com/commentisfree/2014/jul/30/argentina-economy-defaulting-debt-hedge-fund?CMP=fb_us

Every once in a while you get a crazy financial story that makes you wonder how smart the people in charge really are. Argentina’s recent flirting with economic default is proof that the average consumer, managing a few thousands, could probably do a better job than politicians with billions at their disposal.

If you read the papers, you would believe that the land of tango, gauchos, Malbec and great steaks is on the verge of self-destruction: “Argentina dances with default”, groused a Wall Street Journal headline. “Argentina nears cliff in risky debt game”, chided the Financial Times.

Sounds dire, doesn’t it?

It is possible – but very unlikely, despite ongoing talks – that Argentina may willfully destroy its own economy in an ill-fated political attempt to look tough on foreigners, particularly in the form of mostly American hedge-fund managers. You don’t have to watch old episodes of Dallas to know that “rich Americans” is shorthand for “evil”. That stereotype has helped Argentina. In a silly form of financial rebellion, the nation refuses to pay the hedge funds $1.5bn in interest it owes on money it borrowed from them, way back in 2001.

The entire point of Argentina’s threat is to create a panic, to telegraph the country’s own power. It shouldn’t. Default isn’t a bad word, and the stubborn refusal by the Argentines to pay up is empty drama that only ends up proving the country’s own weakness.

The US tried the same technique three times when a team of Tea Party Republicans threatened to pitch America into default. The Americans felt no financial bite from that ill-advised drama – except that the government looked unintelligent and ill-managed – and the Argentines will feel the same embarrassment now.

Absolutely nothing is riding on an Argentina’s default. The entire conflict is composed of absurdities.

Here’s one: Argentina’s president, Cristina Kirchner, maintains that Argentina can’t afford to pay the hedge funds. But it pays for the rest of us to be skeptical of that claim: if Argentina can pay some of its bondholders, it can pay all of them. The country owes the holdouts roughly only $1.5bn, a fraction of the $23bn it will pay its other bondholders in a single payment.

Here’s another: Argentina’s fight with hedge funds sets no precedents for any other countries. The US will feel no impact, beyond a few investors losing some completely manageable amounts of money on their own. Argentina’s mulishness centers around a relatively paltry set of 13-year-old, $1.5bn bonds that were badly negotiated and haven’t been imitated by any other country since.

And another insanity: Argentina is already unwelcome in the debt markets – avoiding your creditors will do that – so a default wouldn’t make it any worse. Argentina has been so financially isolated for so long that it has nearly no global weight to throw around.

Why would a country go to these lengths just to prove a point? It comes down to politics, and it illuminates how silly high finance can get when there are also votes and political power at stake.

Here’s Argentina’s conflict. It’s not complicated. The country borrowed a ton of money, $132bn. Then it had a financial crisis in 2001 and decided it couldn’t pay the interest. Argentina asked bondholders to help it out by trading in their bonds for cheaper ones, which would pay only 30 cents on the dollar. It’s better than zero, so the holders traded in 93% of the old bonds.

A group of hedge-fund holdouts, led by Wall Street billionaire Paul Singer, wanted no part of this. They still wanted Argentina to pay the original interest, so they went to a US court. After 13 years, a US judge ruled last month that Argentina lost and has to pay up by Wednesday. Still, Argentina still refuses to pay.

How will it turn out? This is the first time something quite this stupid is happening, so we’ll have to keep watching. Argentina has pushed its deadline to the very brink, and then some. (Update: on Wednesday afternoon, Standard & Poor’s had judged that Argentina defaulted on its debt. Talks will continue.) What is true, however, is that this is the kind of financial irresponsibility you can only indulge in if you have a lot of money. As anyone who has written a check to a terrible landlord or cold-hearted credit-card company knows, disliking someone is not a good reason not to pay what you owe. Any American who has feared foreclosure can enjoy a bitter laugh: if you didn’t pay your mortgage or credit cards for 13 years, you would be on the street. Argentina just gets to throw a tantrum.

Somehow the goal of financial health gets lost in the infinitely stupid ego-measuring that passes for sophisticated financial negotiations these days. The “nuclear option” of destroying an economy is increasingly becoming a way for politicians to look tough. Unfortunately, it just looks irresponsible. And it’s certainly not the end of the world.

July 31, 2014 12:28 am

Argentina defaults as last-minute talks fail

By Benedict Mander in Buenos Aires and Luc Cohen in New York

FINANCIAL TIMES

http://www.ft.com/intl/cms/s/0/5d7c8016-1832-11e4-a6e4-00144feabdc0.html?siteedition=intl#axzz392FcAQTJ

Argentina defaulted on its sovereign debt for the second time in 13 years on Wednesday, after frantic last-minute talks between the country’s government and holdout creditors failed to strike a deal.

Economy minister Axel Kicillof said “vulture funds” had rejected a renewed offer from the government that had also been made to bondholders who accepted debt restructurings after the 2001 default, but that it was “impossible” to pay them any more.

Shortly before Mr Kicillof’s declarations, Standard & Poor’s placed Argentina’s credit rating on “selective default”, after it failed to make a $539m interest payment on its debt by a Wednesday deadline.

Although Argentina has been locked out of the international capital markets since its previous default in 2001, borrowing costs are now likely to rise to punishing levels for state institutions and the private sector. Economists expect a default to worsen a recession, trigger higher inflation and put pressure on foreign exchange reserves, possibly leading to Argentina’s second devaluation this year.

The default can trigger bondholder claims of as much as $15bn to $20bn because of cross-default clauses.

“We are not going to sign any agreement that compromises the future of the Argentine people,” said Mr Kicillof at a press conference at Argentina’s consulate in New York after the talks collapsed

He said Argentina would take all measures available to put an end to “unprecedented and unjust situation”, adding the country remained open to a dialogue with creditors.

But with negotiations having reached an impasse, Marcelo Etchebarne, an Argentine lawyer, speculated that Argentina may now attempt to restructure its US and UK bonds under local law, although he doubted this would be feasible.

Although the government had already deposited the $539m with Bank of New York Mellon, the bondholders’ trustee, New York Judge Thomas Griesa, has forbidden the bank from transferring the funds to the bondholders. He said that was because it would violate his ruling, upheld on June 16 by the US Supreme Court, that Argentina must pay the holdouts in full at the same time as holders of its performing debt.

“Default cannot be allowed to lapse into a permanent condition or the Republic of Argentina and the bondholders, both exchange and holdouts, will suffer increasingly grievous harm, and the ordinary Argentine citizen will be the real and ultimate victim,” said Daniel Pollack, the court-appointed mediator in the talks between Argentina and the holdouts.

Mr Kicillof maintained a defiant attitude before the default. “Who believes in the rating agencies? Why didn’t they warn the owners of mortgages in 2008 if they know so much about risk?” he asked.

Argentina defaulted on $100bn of debt in 2001-02, at the time the largest sovereign default in history.