MercoPress. South Atlantic News Agency

Argentina in “technical default” while negotiations with sovereign bondholders continue

President Alberto Fernandez's government is expecting to come to an agreement before Argentina suffers the full effects of its default

Argentina “technically” defaulted on Friday for the second time this century after failing to pay US$505 million of interest on its bond debt, but it continues to negotiate a restructuring with creditors. “We're not paying but the negotiations are continuing,” a government official said.

The default, Argentina's ninth overall, was widely expected after the Economy ministry announced on Thursday that following an understanding with creditors, it was postponing talks for a second time with international creditors on restructuring US$ 66 billion of its debt, this time until Jun 2.

President Alberto Fernandez's government is expecting to come to an agreement before Argentina suffers the full effects of its default. Argentina which has been in recession for two years, currently owes US$324 billion, amounting to around 80% of its GDP.

It was already trying to renegotiate its crippling debt before its economy was hit - like others all over the world - by the coronavirus pandemic. The Argentine economy has not grown since 2012

Although it is one of the world leaders in food exports, Argentina has already defaulted eight times in its history, the most recent being in 2001 when it owed US$100 billion. That triggered a painful social and economic crisis.

Argentina's main group of creditors is demanding “a direct and immediate discussion” on its restructure plans. “The group is happy to see that Argentina has expressed its intention to work with the creditors, but actions speak louder than words,” said the Ad Hoc group made up of investment funds including BlackRock and Fidelity.

Economy Minister Martin Guzman has taken an aggressive stance on debt, in part driven by a need to free up resources to fight the novel coronavirus pandemic. Likewise it received support from the IMF which has states that Argentina's sovereign debt is not sustainable, and needs to be mitigates in time.

Argentina asked bondholders for a three-year grace period on debt repayment, a 62% reduction on interest amounting to US$37.9 billion, and 5.4% on capital, US$3.6 billion.

That was rejected with a counter offer that the government says it is studying.

“If the majority agrees to the exchange, the default will be very short. I don't think there will be a reduction in the letters of credit” that would impede essential imports, economist Marina Dal Poggetto from EcoGo said, but “if negotiations take a long time, we'll pay dearly.”

The IMF, which supports Argentina in its restructuring plan, says it has been encouraged by the “willingness of both sides to continue discussions to reach a deal,” spokesman Gerry Rice said. But analysts Capital Economics said “there is a growing risk that the restructuring talks drag on into next year.”

If bondholders take Argentina to court in the United States, it would be “a waterfall of bad news for the country,” said Sebastian Maril, from the Fin.Guru consultancy.

Now that Argentina has defaulted, it also runs the risk of its debt being bought at a cut-price deal by speculative funds that could then choose to pursue much bigger rewards through litigation.