Argentina default is 'probable'

serfboard

From RTE:

RTE wrote:

Fitch Ratings has downgraded Argentina, which is locked in a court battle in New York over its debt, and said the country would probably default. The credit rating agency cut its long-term rating for Argentina to "CC" from "B," a downgrade of five notches, and cut its short-term rating to "C" from "B." A rating of "C" is one step above default.

US judge Thomas Griesa last week ordered Argentina to set aside $1.3 billion for certain investors in its bonds by December 15. Those investors do not want to go along with a debt restructuring that followed an Argentine default in 2002.

If Argentina is forced to pay in full, other holders of debt totaling more than $11 billion are expected to demand immediate payment as well.
Argentine politicians, even those opposed to President Cristina Fernandez, have nearly unanimously criticised the judge's ruling as threatening the success of the debt relief that enabled Argentina to grow again.

Ratings by agencies like Fitch are used by investors to evaluate the safety of a country's debt. Lower ratings can make it more expensive for countries to borrow money on the bond market, exacerbating their financial problems.

Argentina is in a deepening recession and is grappling with social unrest. Besides the court case, Fitch cited a "tense and polarised political climate" and public dissatisfaction with high inflation, weak infrastructure and currency.

Fitch also said that Argentina's economy has slowed sharply this year.

Given that some people were advocating that we default like Argentina, where does this leave that argument now?

David McWilliams wrote:

We can be the new Argentina.

... But the point is that the default and devaluation of the currency didn’t cause the economy to get worse. It caused the economy to recover because people [...] invested after the default, not before it.

There is life after default; in fact there is vibrant life.

Don't think so, Dave. And these funds that were defaulted on haven't gone away, you know.

[Jackass]

serfboard wrote: »

From RTE:
Given that some people were advocating that we default like Argentina, where does this leave that argument now?

Don't think so, Dave. And these funds that were defaulted on haven't gone away, you know.

Whilst defaulting is a complex issue, it's difficult to say how it would effect us long term, but what DMCW said about defaulting and investment post default is true.

A better example is Iceland, where its banking crisis caused the value of their currency to devalue so much that they then received massive foreign direct investment and made a strong export led recovery due to the relative value for their goods.

This doesn't apply to Ireland however, unless we were to exit the euro.

Dirk Gently

serfboard wrote: »

where does this leave that argument now?

.

I think it's a strong argument for living within our means, building a sustainable real economy outside of the "financial industry" (or fantasy industry as I call it) and not borrowing to fund ourselves lest our soverign nation be held hostage by fickle rating agencies and investors looking for zero risk returns on fantasy money. Sad to see a soverign nation held hostage like this, particularly the seizure of the military training vessel by bond holders recently. If you make an investment there should be risk attached to it. If you invested in a triple A country and your investment goes tits up, it means your own research was weak and/or take it up with the ratings agency who got the rating wrong and basically misadvised you on where to lend money.

Argentina done the right thing in defaulting, this is just bondholders wanting risk free enviornments to make easy money on interest. If we keep bailing out people who made risky investments theres nothing preventing them making the same stupid decisions again which in turn kills the domestic economy as demand and growth is killed as tax payers are burdened to subsistance levels bailing out the loan.

Making bondholders liable for any risk to their investment puts pressure on them to do their homework and invest wisely which also puts pressure on soverigns to convince the bondholder through open transparent economic plans that they are likely to be able to afford the repayments. Simply saying were AAA and we guarentee the debt be repayed is no good for anyone, (well except the bondholder who has a risk free investment).

Applying the Argintine example to Ireland is problamatic though because we're in the EU which is a common currency, common market and common law bureaucratic quagmire. Doesn't mean default wasn't right, just means it's painfully difficult to do as a single state withing such a union. Unfortunetly the union as a whole has decided on a no bondholder left behind policy which means us doing an iceland or an argentina is technically improbable without the support of those nations we share a common market with going along with us.

Cookie_Monster

US judge Thomas Griesa last week ordered Argentina to set aside $1.3 billion for certain investors in its bonds by December 15.

what power does a US judge have over Argentina?

srsly78

Cookie_Monster wrote: »

what power does a US judge have over Argentina?

They can freeze assets held in the USA.

View

Cookie_Monster wrote: »

what power does a US judge have over Argentina?

Bonds are legal agreements typically issued under the laws of the largest bond markets (e.g. The USA, England etc).

Hence, a defaulter faces court action in one of those countries.

And, trying to defend such a default in court is basically an impossible task.

antoobrien

Cookie_Monster wrote: »

what power does a US judge have over Argentina?

The nation where the bond has been sold would have the legal power to make rulings, so yes if the bond was solder under US laws the judge would have power.

I wouldn't automatically assume that this is the case here, as US companies have a habit of litigating at home regardless of where the problem is.

serfboard

Dirk Gently wrote: »

If you invested in a triple A country and your investment goes tits up, [...] and/or take it up with the ratings agency who got the rating wrong and basically misadvised you on where to lend money.

Yeah, good luck with that. Sure they'll just throw their hands up in the air and say "well, it was only an opinion!".

Such a joke. How them fúckers are still in business is beyond me.

later12

View wrote: »

Bonds are legal agreements typically issued under the laws of the largest bond markets (e.g. The USA, England etc).

Hence, a defaulter faces court action in one of those countries.

And, trying to defend such a default in court is basically an impossible task.

Most debt is written under local (i.e. national) legislation.

Only high risk debt tends to be written under New York or English law.

And trying to apply a court decision is basically an impossible task, gunboat diplomacy having gone away with the 20th century. In the real world, vulture funds (and it is typically vulture funds) take these cases essentially to give themselves leverage in negotiations, there's really no enforcing a New York court's decision in Argentina.

Back to the topic at hand, what is sometimes interesting to note is that repeated default is the rule, not the exception, for countries who default on their debts. We should not be surprised that Argentina have obeyed this statistical rule, nor in fact that they obey it like clockwork; and we should fully expect them to do so again.

This is all of dubious relevance to Ireland and the Euro Area crisis, but it should come as a red flag to those who advocate Ireland and the Euro Area replicating an Argentine default.

Sponge Bob

serfboard wrote: »

Such a joke. How them fúckers are still in business is beyond me.

Lower form of life than bankers they are.

Rating agencies chasing commission 'worked out' how to put AAA ratings on subprime, the very very worst of asset backed homeloans. They polluted the financial system with this rubbish, particularly between 2004 and 2007 because many pension funds will only buy AAA product.

Argentina defaulted c.1980 and again in 2002. Is this not part of the 2002 default 10 years later though....rather than a 'new' one.

andrew

Dirk Gently wrote: »

I think it's a strong argument for living within our means, building a sustainable real economy outside of the "financial industry" (or fantasy industry as I call it) and not borrowing to fund ourselves lest our soverign nation be held hostage by fickle rating agencies and investors looking for zero risk returns on fantasy money. Sad to see a soverign nation held hostage like this, particularly the seizure of the military training vessel by bond holders recently. If you make an investment there should be risk attached to it. If you invested in a triple A country and your investment goes tits up, it means your own research was weak and/or take it up with the ratings agency who got the rating wrong and basically misadvised you on where to lend money.

If I lend you money and you decide to just not pay how is it unfair that when you do default, I proceed to repossess some of your stuff? Argentina is not being held hostage. It does not deserve any sympathy. It borrowed money, and decided not to repay, knowing that as a sovereign state there was very little it's creditors could do to get their money back. It's only right that it's creditors try to recoup some of the losses they were faced with when Argentina basically showed them the finger.

sock puppet

later12 wrote: »

there's really no enforcing a New York court's decision in Argentina.

Well the ruling forbid BNY Mellon to make payments to any other bondholder which would have resulted in a default without the extension, so it did carry a lot of weight.

later12

sock puppet wrote: »

Well the ruling forbid BNY Mellon to make payments to any other bondholder which would have resulted in a default without the extension, so it did carry a lot of weight.

But of course court rulings matter to clearing houses and banks acting as private agencies for the state, like BNY Mellon.

I am not talking about BNY Mellon defying the court order; I don't know the specifics of this case but one would imagine they were chosen to handle the payment in a very active way after they payment's initial restructuring, in order to alleviate the sovereign risk.

I'm speaking more widely about court decisions in preventing a sovereign from defaulting in itself.

Most banks or clearing houses acting for a state in processing repayment don't have such a pivotal, active role as Argentina's agents had in this case. And where an institution does have that level of involvement, there's no doubting that a local court decision will be material to any repayment.

The same court does not have jurisdiction over sovereigns directly, however.

As a general rule of thumb, if a real sovereign state (i.e. cautiously excluding the Euro Area) wants to default, then very little is likely to stand in its way.

Nody

later12 wrote: »

I am not talking about BNY Mellon defying the court order; I don't know the specifics of this case but one would imagine they were chosen to handle the payment in a very active way after they payment's initial restructuring, in order to alleviate the sovereign risk.

...

As a general rule of thumb, if a real sovereign state (i.e. cautiously excluding the Euro Area) wants to default, then very little is likely to stand in its way.

If I remember correctly the problem here is that Argentina did not do a default (i.e. give the finger to everyone and no one gets paid) but rather a negotiated debt write down to 5% of original value in new bonds. The problem was only 94% of value of the loans accepted it and then final 6% did not. The above loan is part of those 6% who did not accept the new bonds and demand that the original contract is to be upheld.

Also if I remember the news blurbs correctly an Argentinian ship (sailing ship for navy recruits) was held in port in Nigeria due to this debt as well.

later12

Yes the people bringing this case are the 'holdouts', and presumably the reason the agents acting for the Argentines in this case have been given such a central role in the repayment is exactly because of the 2010 negotiations and a deserved suspicion of Argentina's willingness or ability to repay its debts. That is, Argentina clearly has had to deposit funds with BNYM and others as part of the 2010/ 2001 agreement, otherwise it would just make alternative arrangements for repayment of the restructured portion of the debt.

That is an unusual & roundabout way of a court order affecting a sovereign, but it is ultimately an order on the banks processing and advancing payments, not one for which the sovereign itself is directly answerable.

In terms of Argentina not committing a default, when talking about sovereign debt, 99.999999% of the time default is synonymous with restructuring; not repudiation. Hardly any sovereign totally repudiates a debt anymore. I'm 26 years old and it hasn't happened in my lifetime.

murphaph

[Jackass] wrote: »

A better example is Iceland, where its banking crisis caused the value of their currency to devalue so much that they then received massive foreign direct investment and made a strong export led recovery due to the relative value for their goods..

Hmmm, whilst at the same time almost everything they buy (except maybe fish) must have skyrocketed in price if their currency lost so much value? Are ordinary Icelanders happy I wonder?

I prefer that we are locked into the Euro now, so our incompetent politicians can't pull the devalue the punt stunt again and are (going to be) forced to deal with the real structural problems with our economy (primarily spending too much by government and lack of support for innovation).

mr j tayto

Golem XIV - Thoughts | Author of THE DEBT GENERATION

Hers's some interesting reading on the situation in Argentina.

This guy David Malone, named the bondholders in Ireland's case about 3 years ago, long before anyone in Ireland ever tried to do the same.