LONDON, July 30 With just hours left for Argentina to strike a deal with bondholders who refused to sign up for its debt restructurings, rating agencies are poised to declare a default.
Argentina's situation is unusual - it can pay its current bondholders, but a U.S. legal ruling prevents it from doing so unless it pays off its old lenders first.
It is an unprecedented case that has left ratings agency in a tricky position. But the simple fact bondholders won't get their money on time if no solution is found means they will have no choice but to call a default.
"Our criteria are clear," a spokesman for Standard and Poor's said. "If the judicial action does interfere with the payment on the bond, the rating of the bond itself would still be lowered to D for default and the issuer (Argentina) rating would go to SD for selective default."
Moody's and Fitch have similar stances.
Financial markets weren't so sure there would be a default as the deadline neared on Wednesday. The bonds at the centre of the confusion were rising sharply on bets the two sides could reach a last-minute deal.
For Argentina's government, a default would be a further blow to its already damaged reputation. For the holdout bondholders, it could mean more years of legal wrangling to try and get their money back.
If default is declared, it will also open up another set of questions, particularly whether the credit default swaps that investors buy as an insurance policy against non-payment will pay out.
It is not always black and white. When Greece restructured its debt in the euro crisis, the CDS didn't pay out. Ecuador in 2008 is one of the few examples of a sovereign default where they have.
For CDS, a default is determined not by the rating agencies but by a committee made up of 15 members drawn from banks and investment firms and administered by the International Swaps and Derivatives Association. The committee usually makes a decision after a request by a holder of CDS contracts; if the parties are still in talks, some wiggle room may exist.
(For a list of committee members click: here) (Reporting by Marc Jones)