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New default fears loom over Argentina

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An obelisk in downtown Buenos Aires, Argentina.Diego Giudice/Bloomberg—Getty

Argentina, which famously defaulted on more than $82 billion in foreign debt in 2001, could be poised to trigger the early stage of another default on Monday in a complicated case that is playing out in U.S. courts.

The issue stems from Argentina’s long-running legal battle with a group of hedge funds that has refused to agree to a debt restructuring of the South American country’s 2001 default. Argentina has refused to pay the holdout creditors, who are owed at least $1.5 billion. Other investors had agreed to debt restructured through a distressed exchange offering where the bondholders received a haircut.

But late last week, a U.S. District Court judge ruled that Argentina — which intended to use a multi-million dollar deposit from Bank of New York Mellon Corp. to pay restructured bondholders — couldn’t do so without also paying the holdout creditors.

If Argentina were to miss the interest payment on Monday, it would set in motion a 30-day grace period for the country to make the payment and avoid its second default in 13 years, The Wall Street Journal reported.

Earlier in June, the U.S. Supreme Court declined to review a lower-court ruling that blocked the nation from paying its current bondholders unless it also paid the hedge funds that refused to accept the restructured debt deal. That ruling led Standard & Poor’s Ratings Services to lower its junk rating on Argentina even further into junk territory, saying the Supreme Court’s decision “raises the risk of payment interruptions on debt under New York law that is currently being serviced.”

Argentina is scheduled to make coupon payments for $225 million on bonds on Monday, as well as interest payments in September and December, according to S&P.

The woes come at an already-difficult time for Argentina. The nation’s economy unexpectedly contracted for the first time in almost two years during the first quarter of 2014.