Argentina credit story grows murkier as talks collapse

Wed Jul 30, 2014 7:04pm EDT

NEW YORK, July 30 (IFR) - Argentina's murky credit story grew even more complicated Wednesday as the US mediator said the country was headed to default after last-ditch talks with holdout creditors failed.

With years of negotiations appearing to come to nought, Economy Minister Axel Kicillof said the country could not obey a US court order to pay the holdouts in full.

Just hours after S&P downgraded the country to selective default, mediator Daniel Pollack also said Argentina would "imminently" be in default on its obligations.

"The ordinary Argentine citizen will be the real and ultimate victim," said Pollack, after the talks failed to placate the holdouts demanding full payment on their bond holdings.

He said it was "not a mere technical condition but rather a real and painful event that will hurt real people".

Repeatedly calling the holdouts "vulture funds", however, Kicillof rejected the notion that the country was in default and said it had offered the funds the same deal put to other creditors when Argentina restructured its debt in 2005 and 2010.

That offer was not accepted by the funds, which have seen Argentina fight all the way to the US Supreme Court against a ruling by Judge Thomas Griesa that the country must make holdouts whole when it makes its next bond payment.

Failure to make that coupon payment today - after the end of a 30-day grace period - effectively left Argentina in technical default.

Coming late in the day, the latest twists and turns had little immediate impact on Argentine bond prices, which in fact rallied throughout the day on hopes of a breakthrough.

Analysts are largely expecting a knee-jerk reaction to any default news, but it is unclear how much the pendulum will swing back. Up until now, there has been a floor under Argentina bond prices, largely thanks to the assumption that the government would quickly seek ways to pay exchange bondholders.

Griesa has blocked that US$539m payment in the absence of a payment to the holdouts as well, and the Supreme Court declined to hear Argentina's appeal.

Standard & Poor's said it had downgraded the sovereign to selective default because the payment had not been made.

But the agency also affirmed Argentina's local currency rating at CCC+, arguing that "potential disruptions to interest payments on Argentina's external debt are not likely to further erode its ability to service its debt issued in its local currency and under its local law".

Kicillof said he would return home later Wednesday.

Argentina has repeatedly insisted that paying the holdouts in full would be too expensive - and would trigger so-called RUFO clause in the restructured debt that could leave the country open to new waves of claims against it.

Due to cross-default language in the documents, the restructured bond holders could accelerate demands for payment if 25% in each series agree to do so.

But most analysts see that as an unlikely and perhaps even counterproductive course of action. (Reporting by Paul Kilby and the IFR team; Additional reporting by Reuters News; Editing by Marc Carnegie)

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