Event

On 16 June the US Supreme Court declined to hear the Argentine government appeal against a lower court ruling in favour of a group of so-called holdout creditors, bondholders affected by the massive sovereign default of 2001 that refused to take part in the 2005 and 2010 debt restructurings. The decision implied that if Argentina wanted to continue servicing its restructured debt (which it had vowed to do), it was to offer full repayment to the litigants (which it had vowed never to do, referring to them as vultures) when making the next interest payment on 30 June (see Risk Monthly of July). Despite the high stakes, Argentina neither paid nor managed to reach a negotiated solution with the holdout creditors during a 30-day grace period. Therefore, as of 31 July the country is in default again, for the second time in thirteen years.

Impact on country risk

While dominating financial news headlines, the new default has no detrimental impact on short-term political risk. Indeed, as the sovereign already lacked access to international financial markets and since strict controls will mitigate potential capital flight, liquidity will not immediately suffer. The failure to settle the underlying issue with holdout creditors does weigh on longer-term macroeconomic prospects however. Because the default erodes recent efforts to improve relations with international investors (see the agreements reached with Paris Club creditors over arrears, with Repsol over compensation payments for the expropriation of its majority share in YPF, with ICSID litigants over claims and with the IMF over improving the quality of official statistics), current imbalances are likely to prevail. Without fiscal consolidation, monetization of the public sector deficit will continue to fuel inflation. Along with expected sustained unorthodox economic policy making (more import, exchange and capital controls cannot be ruled out) this will hurt confidence and undermine investment. Moreover, another currency devaluation (following the one of January 2014) may further increase the already high systemic commercial risk.

Analyst: Sebastian Vanderlinden, s.vanderlinden@credendogroup.com