August 2014 – ARGENTINA – Argentina’s failure to pay its debts sent ripples through financial markets Friday as its bonds fell for a second day and an industry group ruled investors can collect on insurance that protects against a default. The International Swaps and Derivatives Association ruled that sellers of the insurance, called credit-default swaps, must compensate buyers because the nation’s failure to make an interest payment to bondholders by Wednesday qualified as a credit event that triggers the contracts. Up to $1.04 billion stands to change hands as a result of the ruling, according to the Depository Trust & Clearing Corp. Argentina defaulted on some of its debt late Wednesday after expiration of a 30-day grace period on a $539 million interest payment. Earlier that day, talks with a court-appointed mediator ended without resolving a standoff between the country and a group of hedge funds seeking full payment on bonds that the country had defaulted on in 2001. A quick resolution appears unlikely. In a hearing Friday, U.S. District Judge Thomas Griesa urged both sides to restart negotiations. However, a lawyer representing Argentina said the country had lost confidence in the mediator’s ability to lead discussions. Neither side has announced a date for talks to resume. A spokesman for Daniel Pollack, the mediator, didn’t respond to requests for comment. The immediate impact on financial markets was largely limited to Argentina, though some traders in Europe and the U.S. said the default added to anxieties over other trouble spots, including financial problems at Banco Espírito Santo in Portugal. Citigroup also said Friday that it could lose up to $80 million if U.S. banking regulators at the Interagency Country Exposure Review Committee downgrade Argentina, potentially reducing revenue and raising funding costs.
Dollar-denominated bonds due in 2033 were trading around 86 cents on the dollar Friday, down from about 90 cents on Thursday and 96 cents before the default, according to traders. Trading was thin, the traders said. Argentine stocks rebounded, with the Merval Index ending up 1.7%. Still, the losses for the bonds were mild, indicating many in the bond market expect Argentina to eventually resume payments. For investors, the main source of optimism remains the prospect of a bank-engineered deal to help Argentina pay off the debt it owes the holdout creditors and resume interest payments to other bondholders. Judge Griesa has ruled that Argentina must pay the holdout hedge funds, including Elliott Management Corp.’s NML Capital Ltd. and Aurelius Capital Management LP, when it pays investors who accepted discounted bonds in restructurings in 2005 and 2010. “I think everyone is thinking this is going to be a temporary default,” said Kathryn Rooney Vera, a senior macroeconomic strategist at Bulltick Capital Markets. “Usually, when a sovereign defaults, you have a total collapse in prices.” Argentine bonds held steady after the ISDA decision, which affects buyers and sellers of credit default swaps, including banks, insurance companies and such institutional investors as hedge funds and pension funds. –WSJ