* Argentine dollar Par bond falls 7.6 pct
* Unclear if credit default swaps will be triggered
* Latest debt crisis in sharp contrast to 2001-2002 crash
(Adds Argentine president comments in third paragraph, trims)
By Sarah Marsh and Richard Lough
BUENOS AIRES, July 31 Argentina's bond and stock
markets and peso currency dropped on Thursday after Latin
America's No. 3 economy defaulted for the second time in 12
years following the collapse of last-ditch talks with holdout
The default came after Argentina failed to strike a deal
with lead holdout investors NML Capital Ltd, an affiliate of
Elliott Management Corp and Aurelius Capital Management, in time
for a midnight Wednesday EDT (0400 GMT) payment deadline.
"Those who expect us to sign any old thing, threatening us
that the world will come to an end otherwise, should not count
on me," Argentine President Cristina Fernandez said in her first
comments since the default.
The government maintains it has not defaulted because it
made a required interest payment on one of its bonds due 2033,
but U.S. District Judge Thomas Griesa in Manhattan blocked that
deposit in June, saying it violated his ruling.
At that time, Griesa deemed the $539 million deposit with
the Bank of New York Mellon, Argentina's trustee bank, was
illegal because it did not include a concurrent court-ordered
payment of $1.33 billion plus accrued interest to the holdout
Griesa scheduled a new hearing in New York on Friday at 11
a.m. EDT (1500 GMT) to discuss the default.
Buenos Aires argues that agreeing to the hedge funds'
demands to pay them in full would break a clause barring it from
offering better terms to them than to those who accepted to
steep writedowns in the 2005 and 2010 swaps.
Both Argentine Economy Minister Axel Kicillof and Fernandez
warned that the country could bring more lawsuits to challenge
the contention that it is in default.
Bondholders who participated in the two prior restructurings
of the 2002 default now have to decide whether to seek immediate
full payment of principal and interest on their restructured
debt, a process known as acceleration.
This process requires 25 percent of the bondholders on each
of 16 bonds issued in the 2005 and 2010 restructurings to ask
BNY Mellon for a formal decision on default. The bank has 60
days to decide.
"I don't think at the moment there is a clear answer to
whether bondholders will accelerate a deal. It's probably not
something most bondholders would like to see," said Olivier De
Timmerman, fixed income fund manager at KBC Asset Management in
Another formal declaration of a default could come as soon
as Friday from a committee of buy- and sell-side investment
firms organized by the International Swaps and Derivatives
Association (ISDA). They will decide if a side-bet made on
insuring Argentine government debt is payable.
Argentina's default is generally not seen unleashing
financial turmoil abroad because it has been isolated from
global credit markets since its 2002 default on about $100
billion of debt. But the cost of insurance on the South American
country's sovereign debt surged on Thursday.
It has foreign currency restructured debt worth about $35
billion, including $8 billion under local law, while its foreign
exchange reserves stand at $29 billion.
LENGTHY LEGAL TRAVAIL
Buenos Aires has dubbed holdout investors "vultures" for
picking over the carcass of their broken economy.
Even a short-term default would raise local companies'
borrowing costs, pile more pressure on the peso, drain dwindling
foreign reserves and fuel one of the world's highest inflation
Thursday's market moves reversed a strong rally from
Wednesday when investors had widely anticipated a last-minute
deal. Argentina's dollar-denominated Discount bond due 2033
fell 8 points in price to bid 88 cents on the
dollar, driving the yield up to 9.85 percent. The peso fell 2.52
percent to 12.570 per dollar.
The Merval stock index fell 8.4 percent. Shares
traded locally in Argentine energy company YPF were
down 9.18 percent at 356 pesos per share. The default is likely
to raise borrowing costs for YPF, which issued a $1 billion,
10-year global bond in April.
Asset prices were down sharply but market participants said
they still expected either the government or third parties to
reach a deal eventually with the holdout investors.
As to whether Argentina had suffered a so-called credit
event, the ISDA said it had received its first request regarding
the issue, according to its website. www.isda.org/
Swiss bank UBS asked the 15-member
ISDA-facilitated Determinations Committee (DC) to consider
whether a "failure to pay" credit event had occurred. Its ruling
applies only to those investors who purchased Argentine credit
default swaps (CDS).
The committee is independent of ISDA and due to convene on a
conference call at 1100 EDT (1500 GMT) on Friday, although a
spokeswoman said no timeframe had been set for a vote on whether
to declare a credit event had occurred.
If a super-majority of 12 member firms on the DC vote that a
credit event has taken place then a payout process would start
for holders of these CDS contracts.
UBS cited a missed deadline to deliver interest payments to
creditors holding the restructured debt from the 2002 default,
and Credit Suisse has said CDS payments were "likely to be
"It is still not clear whether the credit default swap of
the country will be triggered. The situation that generated the
default was a lawsuit, not the failure of the country to
transfer the proceeds to pay existing debt," said Emiliano
Surballe, fixed-income analyst at Bank Julius Baer.
Prices on Argentine CDS contracts surged on Thursday. An
investor wanting to insure a $10 million trade for one year
would need to spend $4.04 million as an upfront cost plus an
additional $500,000, according to data provider Markit. At the
start of July the upfront cost was $2.77 million.
The yield spread between U.S. dollar-denominated Argentine
debt and benchmark U.S. Treasury yields widened by 75 basis
points to 635 basis points on the JPMorgan EMBI+ index.
Credit rating agencies downgraded Argentina as a result of
its missed payment to a half-step before declaring absolute
default. Fitch Ratings said on Thursday Argentina was in
Restricted Default and Standard & Poor's on Wednesday pushed the
country to Selective Default.
Argentine banks had scrambled to put together a proposal to
buy out the non-performing debt held by the holdouts and avert
the default. That attempt at a deal collapsed in the final
Some Argentine newspapers reported that JPMorgan Chase & Co
and other banks might be involved in a private-sector
deal with the holdouts to help resolve the default. A JPMorgan
spokesman said the U.S. investment bank had "no comment" on the
Aurelius said it had received no proposals on a
private-sector debt purchase "worthy of serious consideration."
In Buenos Aires, nerves were raw. Argentine Cabinet chief
Jorge Capitanich urged holders of Argentina's exchange bonds to
demand their money from Judge Griesa. Capitanich also lashed out
at U.S.-court appointed mediator Daniel Pollack, calling him
Even so, some holders of Argentine debt were optimistic the
government would seek a resolution.
"It's probably going to be more a soft-default scenario
where prices will slide a bit. There is confidence in what the
government is going to do," said Rune Hejarskov, senior
portfolio manager at Jyske Invest, which holds Argentine debt.
"VERY PARTICULAR DEFAULT"
The relative calm surrounding Argentina's current debt
crisis is a sharp contrast from the mayhem in 2001-2002 when the
economy collapsed around a bankrupt government and millions of
Argentines lost their jobs. Argentina has a population of 40
This time the government is solvent. How much pain the
default inflicts on Argentina, which is already in recession,
will depend on how swiftly the government can extricate itself
from its obligations.
"This is a very particular default, there is no solvency
problem, so everything depends on how quickly it is solved,"
said analyst Mauro Roca of Goldman Sachs.
(Additional reporting by Nicolas Misculin and Eliana Raszewski
in Buenos Aires, Carolyn Cohn, Spriya Srivastava, Marc Jones and
Andrew Winterbottom in London, Gernot Heller in Berlin, and
Daniel Bases in New York; Editing by Jonathan Oatis, Toni
Reinhold and Ken Wills)