Argentina's "Game of Chicken" may lead to its Second Default in 13 Years; Steve Picarillo of Creative Advisory Group, Inc. Comments on the Potential Default of Argentinian Sovereign Debt

It's a race against the clock in a Catch-22 situation. In my view, Argentina "bet the farm" that the hedge funds would cave and, now has placed the country in the path of fiscal disorder. This potential default was 10 years in the making and is now a big "game of chicken."
— Steve Picarillo

Time is short and the stakes are large.

The Argentinian government has until the end of Wednesday to reach an agreement with hedge funds whose refusal to accept a "hair cut" on the c. $1.5 billion of restructured debt. The Sovereign in a very difficult position, barred from making payments on its restructured debt without also paying the holdouts the full $1.3 billion it owes the hedge funds.

It's a race against the clock in a Catch-22 situation.

Another sovereign default may be just days away as Argentina works to dodge its second default in 13 years. While Argentina’s government remains hopeful, it repeated its unwillingness to move in negotiations with creditors. "Time is short and the stakes are large," Steve Picarillo, President of Creative Advisory Group. Inc. said in a statement. 

"Indeed, the Argentinian government has until the end of Wednesday to reach an agreement with hedge funds whose refusal to accept a “hair cut” on the c. $1.5 billion of restructured debt," added Mr. Picarillo. Argentina stated that it is unable to comply with court orders requiring that the hedge funds be paid if the majority of bondholders who swapped their bonds for lower-valued bonds in the past decade are paid. Argentina was due to make a $539-million payment on the restructured bonds on June 30. The 30-day grace period expires Wednesday.

Argentine President, Cristina Fernandez, has refused to negotiate with the hedge funds that have spent more than a decade litigating for payment in full. Now, officials are holding last-ditch talks with the US court-appointed mediator charged with resolving the stalemate.

"The US District court ruling has placed the Sovereign in a very difficult position, barring it from making payments on its restructured debt without also paying the holdouts the full $1.3 billion it owes the hedge funds," Picarillo added. The concern is that Argentina's 2005 and 2010 debt restructuring deals, which creditors accepted a 70-percent write-down, could unwind if it pays the hedge funds in full, as these creditors could seek equal treatment, under the “Rights Upon Future Offers” (RUFO) clause. According to the Argentine government, a trigger under this clause may lead the other creditors to file claims worth $120 billion. The RUFO clause expires at the end of the 2014.  Steve noted, "Argentina is likely looking for a way to bridge the gap between 30 July and year-end."

A default would likely intensify the high-level of economic anxiety in Argentina, which is experiencing significant (15 percent) price inflation (year to 2014) and the potential of another devaluation of the peso.  While the country is in much better financial and political condition than it was in 2001, a default on government bonds could plunge the country into a recession.

Steve Picarillo added. "It's a race against the clock in a Catch-22 situation. In my view, Argentina "bet the farm" that the hedge funds would cave and, now has placed the country in the path of fiscal disorder. This potential default was 10 years in the making and is now a big "game of chicken".

"Looking at the larger picture, an Argentine default would further exacerbate the weakness in the global economy, which is under significant geopolitical and economic stress and may not only extend Argentina's lockout of the capital markets, but could interrupt the international capital markets, especially for the weaker sovereigns," concluded Mr. Picarillo.

Steve Picarillo is a global financial markets, risk, banking compliance and communications executive with exceptional experience in risk analysis of global banking systems and financial institutions. Mr. Picarillo provides analysis and commentary to the financial community, the media, investors and regulators.

For additional information on Steve, please visit his website at www.stevepicarillo.com.


The opinions in this article are the views/opinions of the author and Creative Advisory Group, Inc. (CAG), based on public information and the author’s experience. This is not a recommendation to buy, sell or trade any security, debt or any other financial instrument. The author and CAG do not hold any interest in any of entities mentioned in this posting, and have no plans of entering into any financial trade in the same in the next 72 hours.

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