Why the bond markets fear Argentina's debt crisis

Argentina's legal team Argentina's legal team says the nation can't afford to pay holdout creditors

In a week's time, Argentina could face another default. This time, there could be a severe impact not just in terms of economic growth but also on bond markets worldwide.

A US court has ordered Argentina to meet with its creditors "continuously" from today until they agree a deal.

But, Argentina's lawyer said that a settlement "can't be done by the end of this month." In which case, Argentina would default.

How did it get here?

Argentina is refusing to abide by a previous US court order to pay all of its creditors, specifically the hold-outs who wouldn't agree to the "haircut" or loss that was accepted by the vast majority of bondholders.

This has taken the country to the brink of another default.

I previously wrote about the events that led up to this point.

The refusal of the US Supreme Court to hear the appellate court case means that the lower court's interpretation of pari passu stands.

That pari passu clause in effect means that Argentina must pay all bondholders and not just the ones who accepted the debt restructuring.

Technical default looms

Even if Argentina won't abide by US law, US banks processing the country's payments to its creditors do.

So, by freezing the country's payments, they have already made it miss one payment on its debt that was due on 30 June.

With a grace period of 30 days, the date of technical default is the end of July. Unless its negotiations with creditors yield fruit, Argentina could default again, within about a decade of the last one.

Needless to say, there's a high degree of unpredictability about what will happen including in the country itself.

More technicalities

There's an added complication.

Argentina says that there's a clause in the exchanged bonds known as RUFO (Rights Upon Future Offers) which will trigger it if pays the hold-outs before the end of the year.

That would mean that all exchanged bonds would get the same treatment, i.e. full payment.

President Kirchner says that payment would amount to $15bn (£8.8bn), which is about half of the entire central bank foreign exchange reserves, so it's not feasible for Argentina to do this.

But, it also implies that it is possible for the country to pay creditors this time around. The looming question, though, is what happens with the next sets of payments.

Why it matters

There are at least 2 implications.

First, when the IMF rescues a country, it sometimes advises on debt restructuring if the debt is simply too large to be repaid. Under those circumstances, creditors accept losses often because they are paid something if not 100%.

But, if there is a pari passu clause like in these bond contracts governed by New York law, then hold-outs can sue for full payment which can make other creditors less inclined to accept a loss.

In other words, how debt restructuring has been done is called into question.

For instance, the IMF is considering extending the time to repay for debt to try and avoid debt write-downs.

Secondly, a multi-tiered bond market could result. So, bonds issued under New York or English law with such equal treatment clauses may be viewed as more secure and command a higher price than bonds which don't.

For bonds, the higher the price, the lower the yield, which translates into cheaper borrowing costs for those countries.

For the eurozone which has begun to impose collective action clauses (CACs) in new bonds that essentially force bondholders to accept a debt deal if a large majority agree it, those bonds could become relatively more costly to issue.

It would be an unintended consequence of their attempt to make future debt restructuring easier after the drawn-out process with Greece.

In any case, the precedent of enforcing pari passu despite all that has been argued is now out there. For common law countries like the US and UK, precedent forms part of the law.

So, at this point, Argentina has already begun to re-shape the global landscape with more still to play out as it stands at the precipice of yet another default.

Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this

    Comment number 39.

    Another inevitable consequence of Peronist populist socialism that has blighted this beautiful country and its wonderful but unfortunate populace.

    Take note USA - THIS is what your future looks like under the party of Obama.

  • rate this

    Comment number 38.


    Argentina looks to be well on its way to yet another period of disarray...


    Very good summary. Falklands is the litmus test, The louder they complain the weaker they really are. Argentina should be so much more with so much in terms of natural resources,

    There are few places in the world where people have been let down as badly and as often by their politicians as Argentina.

  • Comment number 37.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 36.

    "Any composition with creditors
    an act of bankruptcy"

    Even if before entertained, such 'composition' (if not instead of formal bankruptcy) will come after recognition of 'bankruptcy', that state otherwise daily a paper element in all partnerships, of all contracts subject to circumstance (in terms or by judgement). Case made for distinction between personal & business assets & liabilities.

  • rate this

    Comment number 35.

    Argentina, what a country, particularly rubbish politicians, nasty military dictatorships, starting and losing bonkers wars, cheating footballers, repeatedly welshing on their sovereign debt and worst of all inspiring crap musicals.

    Nobody much will be crying for Argentina

  • rate this

    Comment number 34.

    Shock and horror! Read all about it - Argentine socialists have run out of other people's money to spend and now they can't borrow any more and are heading for a payment default (again). They could always nationalise a few private companies - oh they already tried that and it didn't work out too well. Guess it's back off to the IMF with a large wheel barrow then.

  • rate this

    Comment number 33.


    Yes states do go bankrupt & actually historical have. To say they don't shows you do not understand bankruptcy. You are part of the banking system that does not understand bankruptcy.

    Any composition with creditors is an act of bankruptcy. Argentina (and the banks) made such a composition and so are bankrupt.

    The true idiots are the regulators who are still giving them free money.

  • rate this

    Comment number 32.

    The banking fools can't accept that they and Argentina are BANKRUPT.

    They further don't seem to understand that capitalism REQUIRES them to actually go BUST.

    There is a basic reason for this: Assets are being held at price levels that are too high for business to use them and competitively make a living.

    It is unfortunate (to say the least) that the stupid ignorant bankers don't understand!

  • rate this

    Comment number 31.

    25 GB I repeat a sovereign state cannot go bankrupt so the phrase shouldnt be used

    29 JStG Funny I thought profit was related to risk undertaken, are you saying all debt should be risk free. In this case the vulture funds bought v cheap post haircut specifically with the idea of holding out for full payment. ie a gamble. You either judge them savvy or vulture depending on your point of view

  • rate this

    Comment number 30.

    "All debts should
    HAVE to be paid
    in full at all times"

    That's the idea, but what of real world, unwise or oppressive debt, failure from natural or own or other mischance? Rather than cut-off hands for 'theft', we've learned ways to 'save what can be saved' for the general good, creditors ranked, debtors as entrepreneurs commended as such: 'no risk no gain'. Our REAL problem is bad faith.

  • rate this

    Comment number 29.

    All debts should have to be paid in full at all times. Not to is pure theft. No nation company or person should ever be let off a penny of debt. It is other people's money not repaying the lot is theft. Argentina in this case should cut all state spending, raise taxes, sell assets, whatever it takes to pay up. This attitude of getting away with middle class form of theft is not acceptable.

  • rate this

    Comment number 28.

    The UK currently is paying £1 billion per week to service the national debt. Once interest rates return to 'normal' the repayments will become unsustainable = default.
    I think that you will find that the interest rate on all gilt edged debt is fixed at the time of issue, so a change in short term interest rates will make no difference.

  • Comment number 27.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 26.


    Perhaps they should've paid down their debts. That's generally sensible but their economy has many other facets needing attention. Neither of us is qualified to make that call.

    But, the current situation, i.e. Argentina's inability to continue servicing debts, is not down to insufficient funds or excess debt, but funds being frozen. this is the result of US court action, not Argentina

  • rate this

    Comment number 25.

    further to 23
    if a business goes bankrupt, the doors are locked, assets sold, the workers all unemployed & the business ceases to exist in any meaningful sense (sometimes name may be sold & live on). that can't really happen to a country,, Argentina & other countries described as bankrupt continued to function as a country, albeit with problems, so in that sense a country can't be bankrupt

  • rate this

    Comment number 24.

    The UK currently is paying £1 billion per week to service the national debt. Once interest rates return to 'normal' the repayments will become unsustainable = default.
    Note: national debt still increasing
    Government borrowing still increasing
    Deficit still increasing

  • rate this

    Comment number 23.

    A sovereign state cannot go bankrupt

    depends how you define bankrupt. a sovereign state which issues & uses its own free-floating currency cannot in a meaningful sense go bankrupt, its currency reserves are infinite
    Prior to its 2002 default which caused current problem, Argentina locked its currency to the $ so it was no longer free-floating & got to a stage some would call bankrupt

  • rate this

    Comment number 22.

    There already is a multi tier debt market. In Greece despite much huffing and puffing the debt written in London was paid in full. The debt written under EU was given a haircut.

    Debt written in London hence is more secure (and hence more valuable) than anything written in Europe. This is one reason Brussels want to run the London markets.

  • rate this

    Comment number 21.

    A sovereign state cannot go bankrupt, I dont know why the phrase keeps being used. We had all this guff about funds not wanting to buy sovereign debt with the PIGS. Now the funds are at the trough, busy snacking. Some of the funds are openly saying they will be buying if a default does happen. The end of the world is never nigh, there is always opportunity and money about

  • rate this

    Comment number 20.

    It is a natural situation in a capitalist system that where debts cannot be paid default should happen. Those that took the risk loaning the money in return for interest should lose their shirts. Instead, bond holders are holding a country to ransom. The clearing out of bad debt, is the only way economies can recover.


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