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Argentina default clouds market horizon

Thursday, July 31, 2014 - 02:28

Argentina's debt default raises the prospect of the Latin American economy sinking further into recession - a worry weighing on sentiment in European markets. As Joanna Partridge reports, the default - Argentina's second in 12 years - came after last minute talks with holdout creditors failed.

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Another knock for Latin America's third-largest economy - and one Argentines remember only too well. The country's just defaulted for the second time in twelve years, after last-ditch talks in New York with holdout creditors failed. Argentina is already in recession - it's now thought likely it will get worse. The default wasn't a huge surprise for markets, and to an extent they'd already priced it in. But it's another concern, on top of other geopolitical worries, says Fidel Helmer from Hauck and Aufhaeuser. SOUNDBITE: Fidel Helmer, Capital Markets Expert, Hauck & Aufhaueser Private Bank, saying (German): "The ratings agency will probably give Argentine bonds junk status. Argentina will find it more difficult in the financial markets, they won't be able to borrow any more money." Argentina restructured its debt following its 2002 default - over 90% of bondholders agreed to accept new bonds with reduced payments. But the holdouts refused and were awarded over $1 billion plus interest by a U.S. judge. Argentines aren't expecting the mayhem seen following the crash in 2001-2002. Then, the economy collapsed around a bankrupt government and millions lost their jobs. This time the government is solvent. But the pain of the default depends on how quickly the government can get out of its obligations. Carlos Caicedo from IHS Country Risk says Argentina now needs to talk to the so-called exchange bond holders, who unlike the holdouts, accepted new bond terms. SOUNDBITE: Carlos Caicedo, Principal Latin America Analyst, IHS Country Risk, saying (English): "Try to move those bonds to a jurisdiction away from the U.S., into an Argentine jurisdiction, and being able to offer the same value of bonds to be paid in pesos and guaranteed as going to be exchanged in dollars." The next six months are critical, as even a short default will raise companies' borrowing costs, drain dwindling foreign reserves and fuel one of the world's highest inflation rates. SOUNDBITE: Carlos Caicedo, Principal Latin America Analyst, IHS Country Risk, saying (English): "There are clear dangers in terms of non-payment risks for the provinces, in terms of currency depreciation, but that's exactly the challenge for Argentina, how to keep this under control, how to weather the storm for the next six months and in January find a better situation to renegotiate the debt." In the short-term, the focus now is on a group of big banks and funds overseen by the International Swaps and Derivatives Association. If they declare the situation a "credit event", most of Argentina's current bondholders would have the right to demand their money back immediately.

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Argentina default clouds market horizon

Thursday, July 31, 2014 - 02:28