Late Rally From Argentina Fails To Delay Default

Jul 30, 2014
Originally published on July 30, 2014 10:09 pm

Talks aimed at resolving Argentina's debt crisis have broken down in New York. A court-appointed mediator has declared that the country will go into default. It is the second time the country has defaulted in about 12 years.

With a midnight deadline looming, the government and its creditors walked away without a deal late Wednesday.

Argentina has been waging a protracted legal battle with a small number of bondholders. They want to be paid in full for bonds they purchased years ago.

"It looked early in the day as though there might be a resolution to this dispute," NPR's Jim Zarroli said on All Things Considered. "We heard that the two sides had actually met face to face yesterday for the first time."

By the afternoon, the rating agency Standard & Poor's said it was placing Argentina in "selective default," which, Zarroli explains, "means it's paid some of its debts but not all of them."

After several hours at the mediator's Manhattan office, there was no resolution, Zarroli tells NPR's Audie Cornish. Mediator Daniel Pollack declared that "the Republic of Argentina will imminently be in default."

Argentina's economy minister, Axel Kicillof, told reporters after the meeting that Argentina had made an offer that was rejected.

Background: The Last Default

"Argentina defaulted for the first time back in 2002, and it was able to get a lot of bondholders to take less money than they were owed," Zarroli says. "But there were these holdouts who were demanding to be paid everything they were owed, and they're the ones Argentina's been fighting with.

"Kicillof said, as he has before many times, the country cannot legally pay 100 percent of what it owes to one group of bondholders without paying the others the same thing; it can't afford it."

What Will The Impact Be?

Mediator Pollack said today that the "consequences of the default are not predictable, but they are certainly not positive."

Argentina has already been having economic problems, Zarroli reports; "this is going to compound them.

"It's been frozen out of the debt market since the 2002 default, and it's likely to stay that way," he says. "It's also going to have a big impact on the value of Argentina's currency. It's going to push interest rates higher for businesses. And of course, it will hurt a lot of those individual bondholders."

Who Are The Bondholders?

There were institutional investors, like hedge funds and pension funds, which bought the bonds at a discount after the first default, Zarroli says.

But there were individual investors, too.

"Some of them retirees who bought the bonds because the interest rates were very high; a lot of Italian pensioners were in the group," he says. "Many of these people took a big hit after the first default. They were required to accept less money than they thought they were getting, and now they're going to get even less than that.

"So a lot of people are hurt by this," he adds, "but the real impact should play out, I think, over the next few days."

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AUDIE CORNISH, HOST:

The Republic of Argentina will eminently be in default. Those are the words today of the court-appointed mediator who's been trying to broker an agreement between Argentina and its creditors. With a midnight deadline looming, the parties walked away without a deal late today. Argentina has been waging a protracted legal battle with a small number of bondholders who want to be paid in full for bonds they purchased years ago. NPR's Jim Zarroli is following the story and he joins us now. And, Jim, bring us up to date on what happened today.

JIM ZARROLI, BYLINE: You know, it looked early in the day as though there might be a resolution to this, this dispute. We heard that the two sides had actually met face-to-face yesterday for the first time. Then there were also published reports today that Argentina's banks had come up with a last-minute proposal to end the stalemate. This morning the two sides showed up at the office of the court-appointed mediator in Manhattan. They stayed there for several hours, but the day dragged on and there was no resolution. By the middle of the afternoon, Standard and Poor's, the rating agency, said it was placing Argentina in selective default, which means it has paid some of its debts but not all of them. And then government officials left the talks without any resolution and said they were heading back to Argentina.

CORNISH: What have you learned about what caused the talks to break down?

ZARROLI: Well, the economy minister, Axel Kicillof, spoke to reporters as he was leaving today. He basically said a lot of the things he's been saying all along - calling the creditors vulture funds. He said Argentina had made them an offer, they rejected it. Argentina defaulted for the first time back in 2002, and it was able to get a lot of bondholders to take less money than they were owed. But there were these holdouts who were demanding to be paid everything they were owed. And they're the ones Argentina's been fighting with. And Kicillof said, as he has before many times, the country cannot legally pay 100 percent of what it owes to one group of bondholders without paying the others the same thing, it can't afford it.

CORNISH: So what is the impact likely to be from a default?

ZARROLI: It's a big question now. The court-appointed mediator, Daniel Pollack, says the consequences of the default are not predictable but they're certainly not positive. This is a country that's been having some economic problems, this is going to compound them. It's been frozen out of the debt market since the 2002 default and it's likely to stay that way. It's also going to have a big impact on the value of Argentina's currency. It's going to push interest rates higher for businesses. And of course it will hurt a lot of those individual bondholders.

CORNISH: Finally, Jim, who are the bondholders and how will they be affected?

ZARROLI: You know, a lot of them are institutional investors, hedge funds, pension funds, people who bought - investors who bought the bonds years ago because they were selling at a big discount after the first default, but a lot of individual investors too, some of them retirees who bought the bonds because the interest rates were very high. A lot of Italian pensioners were in the group. Many of these people took a big hit. After the first default, they were required to accept less money than they thought they were getting, and now they're going to get even less than that. So a lot of people are hurt by this, but the real impact should play out, I think, over the next few days.

CORNISH: That's NPR's Jim Zarroli on Argentina's failure to avoid defaulting on billions of dollars of bonds. Jim, thank you.

ZARROLI: You're welcome. Transcript provided by NPR, Copyright NPR.