Before a country pays out default insurance on its debt, one body — called the ISDA Credit Derivatives Determinations Committee — has to determine that an actual default has occurred and credit default swaps have been triggered.
This is called a “credit event” and when a credit event occurs, that’s when it’s really pay day.
And with Argentina, the ISDA’s ruling was unanimous and swift. All 15 board members, including yes — Elliott Management, one of the hedge funds who won a U.S. lawsuit against the country for over $US1.3 billion — voted to declare Argentina’s failure to pay bondholders on July 30th a credit event.
That ruling, according to Bloomberg, has triggered $US1 billion in swap payments.
All that said, there is time to come to an agreement, overturn the default ruling, and stop the ultimate worst case scenario in which Argentina would have to pay out up to $US29 billion (basically everything Argentina has in the bank).
Now that the country is officially in default, bondholders can file for “acceleration” clauses. Basically, they can call in their loans all at once.
Washington Legal Foundation chief counsel Rich Samp said on a conference call Friday that, usually, once a few investors file for acceleration clauses, others start piling in.
That’s what would really hurt The Republic.
On the same conference call, economist Claudio Loser, former IMF director and current president of the Centennial Group Latin America, who recently authored a report titled, “Argentina v. Holdouts: The Real Costs of Default and Benefits of Settlement,” said that this is yet another sign that Argentina’s leaders do not feel this is a serious matter.
He explained it like this: Since the country experienced a much worse default in 2001 — one in which it actually didn’t have money to pay creditors instead of just choosing not to pay them — the regime thinks of this case like a person who has survived cancer.
Because of their previous ailment, when they get a heart attack, they don’t think it’s so bad.
“Economic activity will suffer and it will suffer in two different ways,” said Loser. “Today people will stop buying… the banks that were so interested in helping the government, they may have problems renewing their lines of credit. Business in Argentina will have much less credit than before at higher interest rates. This will effect the productive chain… Investment which was poor to begin with will decline even further, and the potential for growth of Argentina… over the medium term will suffer enormously.”
Loser said that since Brazil is slowing and commodities prices are down, the Argentina really needs to be ready to ramp up development. The country is at a delicate time now after years of “drunken growth,” but because of this default it’s not going to have the financing it needs.
“It is a tragedy, it is a self made tragedy,” said Loser.
Argentina got in this mess shortly after its last default in 2001. That’s when a group of bondholders — known collectively as NML Capital — bought the country’s sovereign debt on the cheap. NML then opted out of restructurings of that debt in 2005 and 2010, electing instead to collect 100 cents on the dollar for their investment.
Argentina considered that refusal to restructure an insult, as over 90% of bondholders did restructure, and refused to pay NML.
NML sued Argentina for its money and won finally in June.
Still Argentina has said that it will not pay NML under the current circumstances.
In a fiery speech last night, Argentine President Cristina Fernandez de Kirchner said that her country was willing to pay NML but under its own contracts, in its own country, and on its own terms.
“Argentina will pay 100% of its debts … We offered them [NML] an exchange, but they want 1600% return … Argentina will use all of the legal instruments at its disposal to have our own contracts on this deal,” said Kirchner.
But Judge Thomas Griesa, the Judge presiding over the case, has grown tired of this kind of language. He made that clear in a meeting with Argentina’s lawyers Friday morning.
“Half-truths are false and misleading,” he said. “Half-truths do not comply with the law, which requires disclosure of facts,” he said.
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