Argentina’s main government bond, stock market and peso currency dropped on Thursday after Latin America’s No. 3 economy defaulted for the second time in 12 years following the failure of last-ditch talks with holdout creditors.
And another shoe could fall after Wednesday’s default: the declaration of a damaging “credit event” for Argentina. The cost of insuring the South American country’s debt surged on Thursday.
The default came after Argentina failed to strike a deal in time to meet a midnight U.S. EDT (0400 GMT) payment deadline set by a U.S. judge in New York.
Argentina has waged a long legal battle in the United States with U.S. hedge funds, which had rejected its debt restructuring following a 2002 default and which the South American country has characterized as “vultures.”
Even a short default would raise local companies’ borrowing costs, pile more pressure on the peso, drain dwindling foreign reserves and fuel one of the world’s highest inflation rates
The Fernandez government had warned that a default was unavoidable after the U.S. Supreme Court in June upheld a lower court ruling that Argentina owed full payment to hold-out bondholders who refused to accept discounts in earlier restructurings of debt after a 2001 default.
On Wednesday, a group of Argentine bankers tried without success to negotiate directly with the bondholders, who are led by New York-based Elliott Management. Those talks are continuing, with assists from “international mediators,” according to Argentine news reports.
Economists said the elevated costs of borrowing faced by government will come at a time when it has already been hit by the declining prices of agricultural exports, including soy, its biggest generator of foreign exchange. Artana said the default comes as the country was trying to win back confidence on international markets.
After the 2001 default, Argentina experienced a sharp devaluation, failure of the banking system, extensive unemployment and an economic collapse. Recovery took years.