Argentina debt crisis: Talks collapse, staggering economy slips into default

Debt talks between U.S. hedge funds and Argentina collapsed late Wednesday, and the country entered its second default since 2001.

Argentina refuses to pay $1.5B owed to U.S. hedge funds

Argentina's Economy Minister Axel Kicillof on Wednesday said the country offered a group of holdout creditors the same reduced payment terms it has agreed to pay other holders of its restructured bonds, but the holdouts refused the offer. (Carlo Allegri/Reuters)

Debt talks between U.S. hedge funds and Argentina collapsed late Wednesday, and the country entered its second default since 2001.

Ratings agency Standard & Poor's declared Argentina had entered what's known as "selective default" after failing to make a deal with creditors on a $539-million bond payment. 

Technically, that means the bondholders have the right to demand immediate and full repayment. But that's unlikely to happen, as any drastic action would worsen the country's finances and make it unlikely that any lenders would get all their money back, much less turn any profit.

With interest, the value of the loans could be as much as $1.5 billion.

After the midnight deadline passed, Argentine Economy Minister Axel Kicillof reiterated his government's position that it could not accept a deal with U.S. hedge fund creditors it dismisses as "vultures."

Kicillof said the funds refused a compromise offer in talks that ended several hours earlier, although he gave no details of that proposal.

"We're not going to sign an agreement that jeopardizes the future of all Argentines," Kicillof said after he emerged from the meeting with creditors and a mediator in New York City. "Argentines can remain calm because tomorrow will just be another day and the world will keep on spinning."

Consequences 'certainly not positive'

"The full consequences of default are not predictable, but they are certainly not positive," court-appointed mediator Daniel Pollack said.

The move is just the latest debt problem in the country, as bondholders who separately agreed to restructuring plans in 2005 and 2010. Argentina also defaulted on its loans as recently as 2001, when the country's failed to pay back $95 billion in loans.

In that settlement, the owners of about 92 per cent of the bonds accepted a deal that would see them paid back about 30 cents on the dollar. But Argentina still owes almost $10 billion even from that more than 10-year-old settlement.

'Who believes in the ratings agencies?'

Kicillof dismissed a decision by ratings agency Standard & Poor's to downgrade Argentina's foreign currency credit rating to "selective default" because of the missed interest payments.

"Who believes in the ratings agencies? Who thinks they are impartial referees of the financial system?" he said.

Argentine President Cristina Fernandez had long refused to negotiate with the hedge fund creditors, often calling them "vultures" for picking on the carcass of the country's record $100 billion default in 2001.

Some experts suggest the country could likely scrounge up enough cash to pay off this round of creditors, but it would set a dangerous precedent to others who are owed money, and who would likely then demand similar treatment.

"They’ll probably reach some deal over the next six months," BMO economist Doug Porter said.

A man holds up a sign during a demonstration in support of Argentina's government, who has taken a hard line approach in negotiations with U.S. bondholders. (Marcos Brindicci/Reuters)

The holdouts, led by New York billionaire Paul Singer's NML Capital Ltd., 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 defaulted 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.

2001 economic collapse

Restoring Argentina's sense of pride and sovereignty after the 2001-2002 economic collapse has been a central goal of Fernandez and her predecessor and late husband, Nestor Kirchner.

Argentina has made efforts to return to global credit markets that have shunned it since the default. The government paid its debt to the International Monetary Fund and agreed in May with the Paris Club of creditor nations on a plan to begin repaying $9.7 billion in debts unpaid since 2001. It also agreed to a $5 billion settlement with Grupo Repsol after seizing the Spanish company's controlling stake in Argentina's YPF oil company.

Analysts say a new default undermines all of these efforts.

"Argentina … has consistently reaffirmed low expectations," Scotiabank said in a research note early Thursday.

"It is an unfortunate situation which is pushing the country into another default. As defaults go, we all know when we get into one but it is very unclear when and how to get out of it," said Alberto Ramos, Latin America analyst at Goldman Sachs.

"We just added another layer of risk and uncertainty to a macro economy that was already struggling," Ramos said.

With files from The Associated Press