Argentina defaulted on its sovereign debt yesterday

[monkeyboy]

It all started in 2001 when the Argentine government ran out of cash and defaulted on $95 billion of sovereign debt – the largest sovereign-debt default in history.

In 2005 (and 2010), around 92% of the debt was restructured. Creditors agreed to a sharp reduction of the payment they were owed. Argentina issued bonds to these investors and until yesterday, had remained current on payments.

The problem was with that other 8% of investors. These investors – mostly hedge funds that bought the debt when its price was deeply distressed – have insisted that Argentina pay the full amount owed (plus interest).

Argentina had been paying its debt to the 92% group, but not the 8% group of investors. But a New York Court (Argentina's bonds are regulated by U.S. law) blocked a payment to the 92% of investors on June 30, saying Argentina also had to pay the holdouts. Because of a 30-day grace period, Argentina had until yesterday to pay all the investors.

The catch was a clause in the bond agreement that may have prevented Argentina from paying the holdouts more than the other 92% of investors. If Argentina had agreed to pay the 8% group in full, it may have triggered the clause and been forced to also pay the 92% the full amount. This would have cost the government somewhere around $120 billion.

So for the past few weeks, Argentina has been negotiating with the 8% of investors to see if it could figure out a way to pay the holdouts without triggering the clause. Argentine bonds and stocks have rallied sharply in recent months in anticipation of a deal.

Unfortunately, negotiations ended yesterday without a resolution, and Argentina officially went into default again. This means Argentina will be unable to borrow from international markets. Cash-starved companies in Argentina will be forced to pay much higher interest rates to borrow money – if they're able to borrow at all. And Argentine stocks and bonds will likely fall.

However, the decline in stock and bond prices might be less than people think. Argentine stocks and bonds haven't fallen that much today. This suggests investors are hoping a deal might still be reached in coming days. If a deal is reached, the damage of the default would be minimal. However, if no deal is reached over the next few days, stocks and bonds will likely fall further.

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Think about the situation in Greek a couple of years ago, 他哥两是不是难兄难弟？

But 如果你有胆在去年夏天买了GREK，you can be sitting on 50+% return.

[jeepster]

I think this default was well expected. It has been almost 2 years since last time the market index was down more than 1%. The market is due to a sort of setback.

Tomorrow morning's unemployment report is a key indicator of economy recovery. It is a lagging indicator though.

[ecbb]

Wondering if it is a good time to travel there?

[jeepster]

[ecbb]