Government in danger of default


Standard and Poor’s has cut Argentina’s credit rating to CCC-, nine levels below investment grade, according to a report by Bloomberg.

The decision comes after the US Supreme Court refused to hear an appeal by the Argentine government. The appeal is against an earlier ruling by US Judge Thomas Griesa who has ordered Argentina to pay the so called ‘holdout funds’ from an earlier bond sale going back to 2001.

Holdout funds were those funds that rejected two large-scale debt swaps in 2005 and 2010. The first debt swap brought 76% of bonds out of default and the second brought it up to 93%. The remaining private bondholders did not accept the deals and these are known as the holdouts.

Judge Griesa ruled that the government must pay $1.33 billion to the holdouts at the same time it pays bondholders who participated in the 2005 and 2010 restructurings of Argentina’s $100 billion of bonds.

Argentina has a $900 million coupon payment on the restructured bonds that is due on 30th June. Economy Minister Axel Kicillof is suggesting that the government will offer to exchange their current bonds for new ones payable in Argentina, rather than in New York. This would prevent Argentina from having to deposit the money in a US bank, where it could be seized by the holdouts if they are not paid at the same time.

The move by the Economy Minister would mean that Argentina would fulfil its obligations to the 93% of bondholders who agreed to the 2005/2010 restructuring, but it could still risk a technical default on the holdout bonds.

Bloomberg reports President Cristina Fernández de Kirchner as saying that the court ruling was ‘extortion’ and that complying with the orders would lead to total claims on defaulted bonds as rising to $15 billion which the government couldn’t pay.

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