After frantic last minute talks failed to produce a deal late Wednesday, Standard & Poor’s deemed the country to be in selective default. The change in credit rating is likely to hike Argentina’s borrowing costs, and put even more pressure on the country’s already-struggling economy.
The crisis stems from a legal battle with a small group of “holdout” creditors that have demanded payment of about $1.5 billion on bonds they bought after the $144 billion default in 2001. That standoff has blocked payments to other creditors.
Economy minister Axel Kicillof met the “holdouts” for the first time in New York this week but said Wednesday that they rejected an offer he made.
Now, the country may have to devalue its currency to preserve foreign currency reserves, and that could trigger a dangerous rise in inflation that is already projected to hit 40%.
The peso has fallen by about 25% against the dollar this year.
“It’s the worst moment for Argentina to go into default … because they need fresh sources of funding, and that is only possible if they sort out in a positive way their dispute with the holdout creditors,” said Carlos Caicedo, senior analyst for Latin America at IHS.
“Social unrest is a possibility,” he told CNN.
Last minute efforts fall short
There was still hope for a deal on Tuesday, ahead of Wednesday’s midnight deadline.
It looked like Argentina’s banks might throw the government a lifeline. The Wall Street Journal reported that they could agree to pay off the “holdout” creditors — NML Capital and Aurelius Management — and wait until next year to be repaid with government bonds.
But Daniel Pollack, the court-appointed mediator, issued a statement Wednesday evening that the talks fell apart. He said that “default cannot be allowed to lapse into a permanent condition” and that he would still be available to help the parties reach some kind of resolution.
How did it come to this?
The crisis has its roots in Argentina’s last default. It reached agreement with 93% of creditors to restructure its debt, but 7% refused to accept.
The countdown to a new default started in earnest last month when a U.S. judge ruled that if Argentina doesn’t pay the holdouts, it can’t make any more payments to restructured bondholders.
Argentina worried that a deal with the holdouts could trigger billions of dollars in additional claims — money it doesn’t have. The country’s government also insisted it doesn’t have enough time to reach a fair resolution.
This is Argentina’s third default in 25 years, according to ratings agency Moody’s. Still, it no longer holds the record for the biggest — that now belongs to Greece after its distressed debt exchange worth $273 billion at the height of the eurozone crisis in 2012. Russia’s $39 billion default in 1998 is the third largest in history.