Argentina is teetering on the brink of being locked out of international debt markets, after refusing to pay almost $1.5bn in bond repayments last night, putting it in technical default.
The country has been engaged in a lengthy legal battle with a group of investors who refused to accept a reduced payment following Argentina’s default in 2001-02.
Instead of accepting a payout of below 30 per cent on the dollar in that restructuring, the bondholders insisted on the full payment.
The law suit ended last week with a US court upholding a 2012 ruling that the bonds should be paid in full.
But the Argentinian government has tried to continue paying the interest and not the full capital – something deemed illegal by the courts.
Argentinian President Cristina de Kirchner has insisted it is not fair to pay the holdouts more than those who accepted the write down more than a decade ago.
However, the bonds were issued under US law in a bid to reassure global investors they would be repaid – something which has not happened.
The country now has a 30-day grace period to negotiate the payment.
If that does not happen Argentina will be in formal default, effectively cutting off the supply of debt from international investors.
Markets reacted sharply when the decision was announced by the court – spreads on credit default swaps, an insurance against failure to repay bonds, jumped by nearly 1,000 basis points, and the interest rate on Argentina’s 20-year US-denominated bonds rose by 130 basis points.
But analysts think the impacts have already been factored in by markets.
“So far at least, financial markets in Argentina have largely shrugged off the fact that the government now seems destined to enter a technical default on some of its debt obligations,” said Edward Glossop from Capital Economics. “Even if the government does default, this may not have a big effect on local markets – the long-running dispute with holdout creditors is well documented, and some form of default may be priced into markets.”