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Argentina faces default as 'vulture fund' talks fail

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Published : 2014-07-31 10:22
Updated : 2014-07-31 10:22

Last-ditch talks between Argentina and the US hedge funds it has branded "vultures" failed to reach agreement Wednesday, effectively pushing the country into default.

Ratings agency Standard and Poor's had already placed Argentina in "selective default" when Economy Minister Axel Kicillof emerged from the New York talks to confirm that no deal had been reached.

This left it inevitable that Latin America's third largest economy would be unable to meet its repayment obligations by midnight, placing the country in default for second time in 13 years.

"Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default," said Daniel Pollack, the lawyer appointed by a US court to oversee the talks.

Kicillof complained that the creditors, US hedge funds that bought defaulted Argentine debt at knockdown rates, then went to court to demand full payment, had refused to compromise.

"They were trying to impose on us something illegal," he declared, confirming that he was heading back to Buenos Aires without a deal.

Kicillof slammed S&P's downgrade, arguing that Argentina could not be regarded as being in default since the money for the repayment was in a US bank account ready to be paid but frozen by court order.

"That money is there. Obviously, if there were a default, the money would not be there," he stressed, blaming a ruling by US District Judge Thomas Griesa that has prevented its transfer.

"Argentina paid. It has money. It is going to continue to pay. The one who is responsible for this situation is Judge Griesa," he said.

"We are going to pay those who hold bonds that have been defaulted on, but on reasonable terms, not on terms that amount to extorsion, created under pressure, under a threat," he said.

Wednesday marked the deadline for Argentina to make a $539 million payment on debt it had restructured with cooperative "exchange creditors" after its previous 2001 default.

Argentina had deposited the sum -- for payment to those bond holders who had accepted a write-down in deals reached in 2005 and 2010 -- in a bank account when it was due at the end of June.

But Griesa blocked the bank from forwarding the payment unless Argentina also paid two US hedge funds -- the "holdout creditors" -- the full value of their bonds, $1.3 billion, at the same time.

Argentina and these funds -- NML Capital and Aurelius Capital Management -- have spent the last two days locked in talks in New York with a US court-appointed mediator to try a set a deal.

"What we offered them in terms of profit was 300 percent. It was not accepted, because they want more, and they want it now," Kicillof said, insisting the funds were being unreasonably greedy.

"Default is not a mere 'technical' condition, but rather a real and painful event that will hurt real people," Pollack warned, while not assigning blame for the failure of the talks.

There was no immediate reaction from the hedge funds.

S&P's designation of "selective default" acknowledges that Argentina is current on payments to some creditors and is probably able to make some payments on the debt it has defaulted.

It also said it could remove the default label once the country makes the payment on the restructured bonds.

Pollack said there had been a "frank exchange of views and concerns."

Griesa's ruling has trapped Argentina in a Catch-22.

Buenos Aires says paying the holdouts, which it calls "vulture funds,"

could expose it to claims for up to $100 billion from creditors who had previously agreed to take a 70-percent haircut.

If Argentina pays the hedge funds in full, as Griesa has ruled, the 2005 and 2010 debt restructuring deals -- in which creditors accepted a 70-percent write-down -- could fall apart.

The 92 percent of creditors who agreed to take a haircut could launch claims for equal treatment under what is called a Rights Upon Future Offers, or RUFO, clause.

The RUFO clause expires at the end of the year, leaving Argentina scrambling to find a way to placate the holdouts until then.

Analysts have warned a default would deepen the economic malaise gripping Argentina, exacerbating its already troubling inflation -- prices rose 15 percent in the first half of the year -- and perhaps forcing another devaluation of the peso, already devalued 20 percent in January.

A default would also likely prolong Argentina's isolation from global capital markets, which it has been locked out of since halting payments on its more than $100 billion in foreign debt in 2001.

That default, the largest in history at the time, plunged Argentina into an economic and social crisis that it is still battling to overcome.

The global consequences of a new default would however be far smaller than in 2001, analysts say, as Argentina has since been isolated from world financial markets. (AFP)

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