The government in Argentina is currently not willing to make payment on the full $1.3 billion face value of bonds that it defaulted on during the 2001-2002 economic crisis, an amount that would also include interest. This is the amount at issue in the current court case, which follows a June 12 decision by the U.S. Supreme Court to allow rulings by New York District Court Judge Thomas Griesa to stand. Griesa's decision was based on language in the original bonds that requires equal treatment of bondholders, necessitating Argentina to make payments to the holdouts if the government makes any payments to debt holders. It also permits the holdout bondholders to use court resources to identify Argentine financial assets and freeze them if Argentina does not comply.
Argentina was scheduled to make a June 30 payment set at $900 million, an amount the Argentine government is prepared to pay. Buenos Aires is eager to make payments to the group of exchange bondholders who agreed to the 2005 and 2010 restructuring, but is unwilling to issue immediate, full payment to all of the holdouts. The government has already apparently made an effort to avoid the court ruling and proceed with the June 30 payments by transferring hundreds of millions of dollars into trusteeships with international banks, including $539 million to the Bank of New York Mellon.
Through these deposits, Argentina seeks to demonstrate its willingness to pay exchange bondholders. Judge Griesa, however, ordered Bank of New York Mellon to reject the funds, mandating that they remain in Argentina and asserting that the country must continue negotiations with holdouts. It is likely that Argentina will enter technical default June 30, although this is cushioned by a 30-day grace period.
The impact of this default will be different for Argentina this time. Buenos Aires is not actively issuing debts and the U.S. Supreme Court decision is already impacting the Argentine stock market and secondary market trades of Argentine debt. Argentina's economic situation is fragile, and a further loss of confidence could spur additional capital flight, with negative implications for the value of the Argentine peso. Indeed, the black market rate for the peso is already falling and additional drops in demand could push the government to devalue the currency more steeply.
The dangers of paying the holdouts, however, are more troubling to Argentina than the risk of a default. The debt in the hands of the holdouts involved in the New York court case represent only a fraction of what the government owes in principal and interest — $1.5 billion out of a $15 billion total. And these holdouts are spread across the globe and include creditors in Italy, Germany and the United Kingdom among others. Argentina currently holds around $29 billion in foreign currency reserves, meaning payment in full would be theoretically possible, although it would leave foreign exchange dangerously low given ongoing balance of payment challenges. On top of this, there is a risk that the bondholders who agreed to the 2005 and 2010 bond exchange will then sue Argentina for the full amount of the original bonds based on a clause in the exchange bonds that allows them to do so through 2014. This means that Argentina must delay any kind of settlement with holdouts until at least 2015.
Nevertheless, Argentina will have to pay the holdouts eventually. Declining exports mean that the country is facing a real danger of a financial crisis as foreign reserves decline. In order to manage this risk, Argentina is working to resuscitate its energy sector to mitigate the financial impact of imports, hoping to return to net-exporter status. This, however, will take years if not decades. In the meantime, Argentina will need access to international credit markets, although not at the cost of liquidating half of its foreign reserves to pay off the holdouts. The most likely way that Argentina will navigate this dilemma is to delay making a final settlement of its debts.
The U.S. court rulings are unlikely to have significant political impact within Argentina. Although the dispute may cause further economic tension, no party has an interest in using this issue as leverage to unseat the current government. Elections are approaching in 2015 and President Cristina Fernandez de Kirchner has reached her term limit. Opposition politicians are currently in the early stages of building alliances and strategizing for these pivotal elections — they do not want the chaos that would accompany the fall of Fernandez' government. General opinion in Argentine political circles is that U.S. courts have acted unusually harshly in dealing with Argentina's default, and that the United States has overstepped its bounds, making it unlikely that the Fernandez government will be blamed for any economic repercussions.
The court case will likely increase tensions in U.S.-Argentine relations. The ruling has already led a number of international players, including Brazil, Russia and the United Nations, to voice concern about the ultimate effects of default on Argentina. As the case progresses, more opportunities could arise for foreign players to express support both rhetorically and concretely. Russian President Vladimir Putin has already announced that he will meet with Fernandez in Buenos Aires in July while he is in the region for the sixth annual BRICS Summit in Brazil, where further support for Argentina's position could be forthcoming.
