S&P Declares Argentina in Default

Argentina defaults again.

From the Bloomberg:

Standard & Poor’s declared Argentina in default on its foreign-currency obligations after the government missed a deadline for paying interest on $13 billion of restructured bonds.

The South American country failed to get the $539 million payment to bondholders after a U.S. judge ruled that the money couldn’t be distributed unless a group of hedge funds holding defaulted debt also got paid. Argentina, in default for the second time in 13 years, has about $200 billion in foreign-currency debt, including $30 billion of restructured bonds, according to S&P…

The S&P announcement ends months of speculation on whether the country would be able to cut a deal with the holdouts in time to avoid a default on the country’s bonds due in 2033. As much as $29 billion of securities are subject to so-called cross-default clauses, allowing holders to demand immediate repayment. The amount is equal to the country’s foreign-currency reserves.

Argentina’s rating was cut from CCC- because “the grace period expired with bondholders not receiving their payment,” according to a statement from S&P.

Nicolás Cachanosky at the Mises.org explains on the historical and technical background behind the Argentina government’s default

Here is a slice:

Following the 2001 default, Argentina offered a debt swap (a restructuring of debt) to its creditors in 2005. Many bondholders accepted the Argentine offer, but some of them did not. Those who did not accept the debt swap are called the “holdouts.” When Argentina started to pay the new bonds to those who entered the debt swap (the “holdins”), the holdouts took Argentina to court under New York law, the jurisdiction under which the Argentine debt has been issued. After the US Supreme Court refused to hear the Argentine case a few weeks ago, Judge Griesa’s ruling became final.

The ruling requires Argentina to pay 100 percent of its debt to the holdouts at the same time Argentina pays the restructured bonds to the “holdins.” Argentina is not allowed, under Griesa’s ruling, to pay some creditors but not others. The payment date was June 30. Because Argentina missed its payment, it is now under a 30-day grace period. If Argentina does not pay by the end of July it will, again, be formally in default.

This is a complex case that has produced different, if not opposite, interpretations by analysts and policy makers. Some of these interpretations, however, are not well-founded

Pls read the rest here

The default above are on foreign denominated bonds. 

By pursuing inflationist policies, the government of Argentina has long been defaulting indirectly to domestic liabilities

As of 2008, Argentina’s domestic bonds represents around 27.8% of GDP according to the BIS.

As I have been saying here all inflationism is about access to credit, in particular cheap credit. As I wrote back in May (bold original): governments promote bubbles or “something for nothing” in order to gain access to credit, especially cheap credit to finance their boondoggles, junkets, pork and other welfare-warfare based political projects. 

In Argentina's case, with little access to credit markets the government has shanghaied the nation’s resources through inflationism (monetization of deficit) in order to maintain the privileges by politicians and the politically connected elite. I dealt with Argentina’s predicament in length here where I wrote (bold original): because of the lack of access to credit, the government of Argentina has used the printing press to finance her increasingly socialist spendthrift government.

The crashing peso and serious stagflation (from Cato’s troubled currency project) is a fantastic example of how government “confiscate, secretly and unobserved, an important part of the wealth of their citizens”

In short, Argentina’s government hardly exhibited an ounce of intention of ever paying back on loans, thus the inevitability of the default

Asst Professor’s Cachanosky’s conclusion (bold mine)

The problem is not Judge Griesa’s ruling. The problem is that Argentina had decided to once again prefer deficits and unrestrained government spending to paying its obligations. Griesa’s ruling suggests that a default cannot be used as a political tool to ignore contracts at politician’s convenience. In fact, countries with emerging economies should thank Judge Griesa’s ruling since this allows them to borrow at lower rates given that many of these countries are either unable or unwilling to offer credible legal protection to their own creditors. A ruling favorable to Argentina’s government would have allowed a government to violate its own contracts, making it even harder for poor countries to access capital.

Oh by the way, Argentina’s stock market the Merval index seem to have cheered on the default with a fabulous 6.95% gain yesterday. Since 2013, the Merval index has been on the rampage as the Argentine Peso and stagflation intensified. 

My guess is that such run is hardly about debt driven bubble founded on “this time is different” outlook but as seminal manifestations of hyperinflation as the public seeks shelter stocks (which are titles to capital goods) from a drastic and dramatic fall in the currency.

Interesting developments. 

My guess is that Argentina will become a blueprint for the coming wave of global government debt default

Updated to add 

Professor Christopher Westley at the Mises Blog suggests for Argentina to default. Doing so would bring some sanity back to Argentina's political economy (bold mine)

Argentina should continue with its default. It’s the only moral choice. If it doesn’t default, it will (i) maintain its creditworthiness in the future, which only puts off for another day the inevitable end to the government’s tax-borrow-spend policies that only favor the political class and well-positioned cronies, and (ii) it imposes Greece-like austerity on the remaining productive sectors and other innocent parties when real austerity would imply vastly reducing the size and scope of the Argentine state. If it defaulted and the government was finally deemed a credit risk by the World Bank (and its cronies), then the government’s ability to intervene in the economy would be severely hampered and incentives for real savings and sustainable economic growth would finally reappear.