Argentina’s G2B Debt Could Trigger Doomsday

Argentina is currently suffering through a recession and has a struggling economy. According to the Associated Press, most Argentines blame international debt for causing the crisis that has led to the nation defaulting on these loans, which it had with hedge funds in the United States. Additionally, the nation’s citizens are fearful of taking on major new loans.

This is why Argentina president Cristina Fernandez is in such a precarious position right now. The Argentine government is preparing to negotiate its repayment plan with the U.S. The U.S. Supreme Court already dismissed Argentina’s previous appeal. So what happens if Argentina pays the plaintiffs? The news source explained that the first option is to pay 100 percent in cash, plus interest, on debt that went into default a dozen years ago, starting with $907 million by June 30.

However, according to a recent AP article, Fernandez is holding fast to the idea that her government can ignore the U.S. Supreme Court rulings. Fernandez believes that the Argentine government can meanwhile keep its promises to a much larger group of bondholders.

The holdout creditors are led by NML Capital Ltd. and Aurelius Capital Management, which is chaired by Mark Brodsky.

“Argentina’s lawyer has informed the court that unidentified government officials will come to New York on an unidentified day next week to discuss settlement after years of rebuffing settlement overtures,” Brodsky said in a statement on Wednesday. “I have learned not to rely on any assurance Argentina’s counsel provide to our courts. I expect a charade, but I hope to be proven wrong.”

Unfortunately, it seems that Brodsky was not proven wrong. A Thursday report from Reuters said that Argentina had not prepared a team to go to New York.  Cabinet chief Jorge Capitanich said in a statement on Thursday “there is no delegation prepared for a possible trip to the United States.” However, Capitanich added that he has not ruled out a chance for negotiations.

The due date for the debt payment is June 30, but there is a 30-day grace period before Argentina would go into default.

Previously, Fernandez said she is open to negotiations. But, the president also accuses the holdouts of “extortion,” and implied that her government might try to skirt the U.S. court rulings by bringing the debt under Argentine law.

According to bond analyst Josh Rosner, Wall Street firms are willing to loan the money – which Fernandez says is $15 billion – to Argentina.

“If the government chose to raise capital as a means of resolving this impasse, it would normalize its relations with the international capital markets, reduce its cost of funds going forward and immediately begin to attract the foreign investment necessary to develop key industries, including its energy sector and the broader economy,” Rosner told the AP.

Should Argentina defy the judge’s rulings, it would force U.S. banks to stop processing its payments to the 92 percent of bondholders who have been getting paid. Then, Argentina would propose making trading the defaulted bonds for new ones paid from Buenos Aires and guaranteed by Argentine law.

So what’s the downside to that plan?

Experts believe that it will not succeed for several reasons. For example, one economist explained to the AP that many investment funds are barred from making such a change, while others would be nervous about relying on Argentine law.

Until the true negotiations begin though, it’s difficult to say how the debt will be paid.